Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-2269a-YU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO STOPANSKA BANKA SKOPJE WITH THE GUARANTEE OF THE SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA FOR A MACEDONIA STREZEVO IRRIGATION PROJECT July 26, 1978 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. I CURRENCY EQUIVALENTS * Currency Unit - Yugoslav Dinar (Din.) US$1 - Din. 18.00 Din. 1 - US$0.0555 Din. 1,000 - US$55.55 Din. 1,000,000 - US$55,555.55 * The Yugoslav Dinar has been floating since July 13, 1973, as of December 31, 1977, the rate was Din, 18,4452 - $1 FISCAL YEAR January 1 - December 31. GLOSSARY OF ABBREVIATIONS LDR - Less Developed Regions (of Yugoslavia) SFRY - Socialist Federal Republic of Yugoslavia SAS - Social Accounting Service SBS - Stopanska Banka Skopje Vodostopanstvo - Pelagonija Water Economy Enterprise FOR OFFICIAL USE ONLY YUGOSLAVIA MACEDONIA STREZEVO IRRIGATION PROJECT Loan and Project Summary Borrower: Stopanska Banka Skopje (SBS). Guarantor: Socialist Federal Republic of Yugoslavia. Beneficiary: Pelagonija Water Economy Enterprise (Vodostopanstvo). Amount: US$82 million equivalent in various currencies. Terms: Amortization in 15 years, including three years grace, with interest at 7.9 percent per annum. Relending Terms: The proceeds of the loan would be on-lent to the bene- ciary (who would bear the foreign exchange risk) on same t-erms as Bank loan except for additional 0.5 percent spread on interest rate to cover administra- tive costs of Borrower. Project Description: The Project is part of Macedonia's long term irrigation development program for the Pelagonija plain, the single largest area of arable land in the Republic. The Project seeks to increase crop production on 20,300 ha, to raise productivity and income, and to create employment in an area where unemployment and emigration are among the highest in Yugoslavia. The increased food production on the newly irrigated land would substitute for imports, cater to increasing domestic demand and provide limited export potential. The project would supply bulk water to the community of Bitola and to a thermal electric power facility under construction. Feasibility and preparation studies for three possible future irrigation projects are also included. The project would directly benefit about 5,500 individual farm families and 3,600 families employed in social sector agribusiness. These direct beneficiaries would number about 50,000 in one of Yugoslavia's less developed regions and average agricultural income per capita is expected to increase about five-fold. The proportion of farmers above the relative poverty level or target group would increase from 10-20 percent to about 85-95 percent. At full production incremental output is projected to exceed This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - 500,000 tons of produce with a value of about US$26 million in January 1978 prices. Crop production patterns will shift towards more labor intensive, higher value crops. Adequate water supplies to the town of Bitola will remove a constraint to the expansion of processing and other industries in the area, as well as contributing to public health. Risks which have to be considered relate to construction timing, financing, and institutional setting. The con- struction timing risk is largely contained by an accele- rated pace of tasks which are preliminary to construction work and by advance contracting of critical components which must be completed in 1978 to ensure a four year construction period. The financing risk consists of cost overruns which could occur if the four year construction schedule is not met, but the cost overrun guarantee from SBS and the special efforts of the Republican authorities to obtain all necessary funds represent adequate assurances that funds would most likely be provided without undue delays. The institutional risks are associated with the prevailing system of land use rationalization in the project area. This land use system presupposes the continuing success of cooperative grouping of individually held land parcels. Inability to achieve this land ra- tionalization through cooperative measures would detract from the benefits of the project and has been taken into account in the sensitivity analysis in the economic rate of return. Based on the historical record, such risk is considered acceptable and prudent. Estimated Cost: Local Foreign Total Percent -----(US$ MillionT---- Dam and Irrigation Works 61.3 42.2 103.5 59 Equipment 4.8 9.6 14.4 8 Land Compensation 7.4 - 7.4 4 Engineering and Administration 6.2 0.1 6.3 4 Irrigation Feasibility Studies 0.9 0.6 1.5 1 Physical Contingencies 7.1 5.7 12.8 7 Price Contingencies 18.5 11.5 30.0 17 Subtotal 106.2 69.7 175.9 100 Interest on Bank Loan During Construction - 12.9 12.9 Total 106.2 82.6 188.8 - 11.1 - Financing Plan: US$ Million Percent IBRD 82.0 44 SBS /a 80.1 42 Republic of Macedonia Grant 11.1 6 Equity Contributions from Enter- prises in Town of Bitola 15.6 8 Total 188.8 100 /a Includes funds of US$67 million from the Federal Fund for Less Developed Regions. Estimated Disbursements: US$ million---------- Bank FY 1979 1980 1981 1982 1983 Annual 14.4 23.1 35.0 18.0 1.5 Cumulative 14.4 37.5 62.5 80.5 82.0 Rate of Return: 15 percent Staff Appraisal Report: Report No. 1934a-YU, Date: July 14, 1978 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO STOPAISKA BANKA SKOPJE WITH THE GUARANTEE OF THE SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA 1. I submit the following report and recommendation on a proposed loan to Stopanska Banka Skopje (SBS), with the guarantee of the Socialist Federal Republic of Yugoslavia, for the equivalent of US$82.0 million to finance the foreign exchange costs including the estimated interest and other charges during construction on the proposed loan for an irrigation project. The loan would have a term of 15 years, including three years of grace, with interest at 7.9 percent per annum. The proceeds of the loan would be on-lent to the Pelagonija Water Economy Enterprise (Vodostopanstvo), the project authority and implementing agency, on the same terms as the Bank loan except for an additional 0.5 percent spread on interest rate to cover administrative costs to SBS. The foreign exchange risk on the Bank loan would be borne by Vodostopanstvo. PART I - THE ECONOMY 1/ 2. A basic economic mission visited Yugoslavia in November 1972; its report entitled "The Economic Development of Yugoslavia" (194a-YU) was dis- tributed to the Executive Directors on January 2, 1974. An economic mission visited Yugoslavia in October 1975; its report entitled "Economic Memorandum-- Yugoslavia" (1086b-YU) was distributed to the Executive Directors on September 3, 1976. A Basic Economic Mission to review the Social Development Plan 1976- 80 and to assess the economic implications of the new institutional framework emanating from the 1974 Constitution visited Yugoslavia in October and November 1976; its report entitled, "Yugoslavia: Self-Management Socialism and the Chal- lenges of Development" (1615a-YU) was distributed to the Executive Directors on April 5, 1978. Basic data on the economy are given in Annex I. Economic Trends and Development Issues 3. The economic development of Yugoslavia over the past two decades has been impressive, characterized by rapid growth accompanied by dynamic structural and institutional changes. GDP grew in real terms (1972 prices) at an average annual rate of about 7 percent and, given an average population growth rate of one percent per year, real per capita income more than tripled. In 1976, per capita GNP was estimated at $1,680 (World Bank Atlas Methodology). The activity of the social sector, especially industry, was the driving force 1/ Part I of this report is identical to that in the Reports and Recommenda- tions of the President for the Third and Fourth Industrial Credit Projects (Report Nos. 2235a-YU and 2360-YU) of June 26, 1978. -2- of the economy and the share of industry in GDP increased from about 23 per- cent in 1955 to about 32 percent in 1976, and paved the way for the develop- ment of a modern industry/service oriented urban society. 4. The population growth rate which averaged 1 percent per year during the last two decades, however, varies considerably among the regions ranging from an average rate of 1.6 percent for the less developed Republics and Provinces (LDRs) to 0.7 percent for the developed ones (DRs). Structural changes in the economy have permitted a sizeable transfer of the labor force from agriculture to industry and services. Despite this, by 1975, 39 percent of the employed resident labor force was still engaged in agriculture and forestry, mostly on small private farms; industry (including mining) accounted for 24 percent, and other sectors for 37 percent. 5. The socio-political framework evolved through several constitu- tional amendments which were consolidated in the new Constitution of 1974. It strengthens three important features of the socio-political system of Yugoslavia. First, self-management, whereby the use and control of the socially owned means of production are entrusted to the workers' collectives, is the fundamental right and obligation of every Basic Organization of Associated Labor (BOAL--the smallest identifiable unit of production which produces a marketable output) in every sector and activity. Second, the responsibility for most important social and policy decisions is shifted from the Federation down to the Republics and Provinces, and on to the communes. And third, the management and financial responsibility for social activities (health, education, welfare, etc.) is transferred from the realm of the state to Communities of Interest (decision-making bodies which comprise delegates of both suppliers and users of the specific services). Responsibility for certain economic activities affecting large segments of the society (like communal services, power production, highways and water management) is pro- gressively similarly organized through Communities of Interest. 6. The social sector, which includes government, enterprises and public institutions such as libraries, hospitals, theatres and schools, has the lead- ing role in economic and social development. It accounts for 85 percent of CDP and employs over half of the total labor force. The private sector is comprised predominantly of peasant farms (generally with a 10 hectare limit to land holdings) and small enterprises (generally with a 5-person limit on the number of nonfamily workers), mainly in handicrafts, construction, trade, transport and tourism. In the past, the private sector had been relatively neglected by government policy. However, lately increased attention is being devoted to private farmers with a view to accelerating the growth of agricul- tural production and reducing the rural/urban income disparity. New legisla- tion has also been enacted to promote private business through the pooling of resources in joint ventures with social sector enterprises or among private small scale industrial, transport, trade or other entities. These measures aim to encourage private sector productive investment and employment, by circumventing the 5 employee limitation, and to absorb the returning migrant workers and mobilize their savings. 7. Regional income disparity--with a gradient of per capita income fall- ing generally from North to South--is one of the most important development - 3 - issues facing the country. Four regions can be distinguished by stage of development. The Republic of Slovenia is the high per capita income region with incomes almost double the national average. The Republics of Serbia and Croatia and the Autonomous Province of Vojvodina make up the middle income regions, with incomes ranging from 100 to 125 percent of the national average. However, even within these regions there are pockets of underdevelopment, which basically coincide with private sector agriculture. The Republics of Bosnia-Herzegovina, Montenegro and Macedonia, with per capita incomes about two-thirds of the national average, constitute the upper group among the officially designated less developed regions. The Socialist Autonomous Province of Kosovo (Kosovo), with an average per capita income of only 30 percent of the national average (about US$500.0 equivalent for 1976), is the least developed region. These inter-regional disparities can be traced back further to intra-regional disparities. Within Republics and Provinces the per capita income spread betiween communes can extend over the range of 10 to 1, and it is the prevalence of stagnating poor rural communes within the LDRs which largely determines the disparity between the regions. The rate of economic growth of the LDRs as a whole was only slightly below the average for Yugoslavia, but due to t'he faster population growth (1.6 percent per year versus 0.7 percent in th,e DRs) the income disparity had until recently tended to widen. In order to reverse the trend and to accelerate economic growth and social development in th,e LDRs, mechanisms were instituted for sizeable transfers of financial resources, initially on a non-returnable basis. Since 1971, net credits on highly favorable terms (containing a grant element of around 50 percent) were imade available to the LDRs through the Federal Fund for the Accelerated Development of Less Developed Regions, equivalent to about 20 percent of their total investment in the social sector. These transfers amounted to about US$430 million equivalent in 1976 in addition to about US$250 million equivalent being transferred as budgetary grants for social services. The mechanism for both categories assures a growth of transfers in line with the growth in GDP. 8. The rate of open unemployment to the total resident labor force amounts to about 5 percent but understates the magnitude of the employment generation problem because of the existence of large reserves of rural under- employed and the need to employ returning migrant workers. The rate of regis- tered 1/ unemployment to social sector employment averaging about 11.9 percent for the country as a whole in 1976 is perhaps a better measure. A rapid growth of the social sector which provides more productive employment is, therefore, imperative if the natural increase of the labor force, in addition to the returning migrants, is to be absorbed and the ranks of the unemployed reduced. This problem takes on added urgency as the incidence of unemploy- ment 2/ is highly regionalized ranging from 25.4 percent at one extreme in Kosovo to 1.5 percent in Slovenia. 1/ In Yugoslav definition, unemployment is measured in terms of registered job seekers actually unemployed as well as those employed but seeking new jobs. 2/ Ratio of registered unemployment to social sector employment. -4- Recent Developments 9. In 1975, the growth rate of the economy receded to 4.5 percent, fol- lowing the rapid increase of GDP of 9 percent in the previous year. This was due mainly to the combined effects of a restrictive monetary policy, stagnat- ing exports and a reduced growth of personal incomes and leveling consump- tion; economic investment and housing construction provided the major growth stimulus during 1975. The inflationary pressure, which built up during 1974 and extended into 1975, receded drastically in the second half of the year; the rate of increase of industrial producer prices decreased from 30 percent for 1974 to 22 percent in 1975, and the index of real personal receipts stag- nated for the whole of the year. The good harvest in 1974 had a favorable impact on the balance of payments, although meat exports were severely affected by the European Community ban on meat imports. Exports to oil producing coun- tries and to the non-convertible currency area continued to expand rapidly in 1975, but were insufficient to compensate for the sharp decline in exports to the convertible currency area. As a result, commodity exports declined by 2 percent in real terms. Workers' remittances and receipts from tourism increased marginally. However, a larger contraction of imports and an improvement in the terms of trade led to some decline in the current account deficit to $1.0 billion as compared to $1.2 billion in 1974. 10. Further reduction of the balance of payments deficit and of the inflationary pressures in the economy were the major objectives of economic policy during 1976. As compared to a nominal increase of 22 percent in 1975, GDP grew by 14 percent in nominal and 4 percent in real terms in 1976. Fol- lowing a near stagnation of industrial production (and economic activity in general) in the first half of the year--as a result of the implementation of new legislation enforcing greater financial discipline on enterprises-- industrial growth picked up in the second half of the year and recorded a rise of about 4 percent. The combination of the economic slack and price policy resulted in a cutback in the rise of producer prices and the cost of living to less than 10 percent, i.e. less than half the previous year's increases. Favorable results were also realized in the field of foreign trade. The marked deceleration of inflation, the slackening of domestic demand and the revival of Western European demand, as well as foreign trade policy, resulted in a 20 percent growth of merchandise exports and about 4 percent decline of imports in nominal terms. The reduced balance of trade deficit was also aided by the inflow on account of invisibles, resulting in a $150 million balance of payments surplus for the year. Foreign exchange reserves also reached a record of over $2.0 billion. Social sector employment grew by 3.7 percent and allowed the absorption of some returning migrant workers yet, with the realized GDP growth rate, this meant a virtual stagnation of average workers' productivity for the year. Estimates for 1977 and Prospects for 1978 11. Although initial projections for 1977 envisaged a moderate GDP growth rate of about 5.5 percent and a balance of payments deficit of some $500 mil- lion, estimates for the year indicate both a higher economic growth rate and balance of payments deficit than expected. The pick-up of economic activity which started in the second half of 1976 continued into 1977 with industrial production growing at a rate of about 10 percent in the first half of the year. The large monetary expansion in 1976 also enabled the expansion of investment and other components of domestic demand and resulted in a somewhat higher inflation rate than anticipated (cost of living rise of 13-15 percent). For the year as a whole, GDP is estimated to have risen by almost 7 percent with industry growing by 8 percent and agriculture by 4 percent. Employment is estimated to have grown by about 3.5 percent and average workers' productivity at an almost equal rate. The most significant deviation, however, occurred in the foreign trade sector. As a result of the slow growth of exports and the fast growing imports connected with expanding industrial production, which was not compensated for by the growth of invisibles including workers' remittances, the balance of payments deficit for 1977 is expected to amount to $1.3 billion matching that for 1974. The country was able to contract the necessary for- eign financing in 1977, however, maintaining its external reserves at about the previous year's level. The program for 1978 envisages the stabilization of the economic growth rate of 6-7 percent, a reduction of the inflation rate and a major consolidation of the foreign trade sector to improve the balance of payments position. Medium- and Long-Term Objectives and Prospects 12. The surfacing of major economic problems during 1974, such as high international inflation and balance of payments pressures, led to a reappraisal of development objectives. More emphasis was to be given to the development of Yugoslavia's own natural resources, with the development of the energy sector as the highest pr:iority. The focus is on electric power, where the generating capacity is falling critically short of the rapidly rising power requirements of the expanding economy. The development of the power sector will be based primarily on the viable hydropower potential remaining to be developed and soft-coal reserves of the country. Other priority activities are ferrous metallurgy, some segments of non-ferrous metallurgy (notably lead, zinc, copper, nickel and bauxite/aluminum), technologically advanced production equipment, basic chemicals including petroleum refining, agriculture and food processing, interrepublic transportation, multipurpose works, and housing and basic construction material. 13. This emphasis on accelerated development of the raw material basis and of the economic infrastructure requires a more capital-intensive invest- ment pattern, associated with longer time lags between investment and out- put. To sustain this development path, both continued high borrowing abroad and an increased savings rate will be essential. Since, with the possible exception of private savings, interest rates have not been given a signifi- cant role to play in the determination of the level of aggregate savings, the income policy--i.e. the guidelines governing the distribution of enterprise income between workers' income and accumulation--will have to play a crucial role. 14. The new Five Year Plan (1976-80) focuses on the implementation of these objectives. For GDP growth, an average rate of 7 percent per year is proposed, compared with a target growth rate of the previous Plan of 7.5 per- cent and a realized growth rate of 6.5 percent. For employment, the average planned growth rate would come to about 3 percent with annual increments exceeding the natural increase of the labor force by growing margins. This would permit more vigorous pursuit of two major social objectives: the reduc- tion of the number of temporary migrants abroad (estimated at about 900,000 in 1975), and an increased absorption of the rural underemployed into the social sector, which is likely to have significant impact only in the DRs. The economy will continue to be open to the world market, although the composition of foreign trade is expected to change with a reduced share for raw material and semi-finished products on the import side, and an increased share for agricultural products and manufactured goods on the export side. Workers' remittances are not expected to increase in real terms, but rising tourism receipts and construction work abroad are expected to compensate for the expected declining importance of workers' remittances. 15. The reduction of regional disparities is another priority objective of the new Five Year Plan. To that end, the mechanisms for the transfer of financial resources to the LDRs in the form of loans at concessionary terms for economic investment and of budgetary grants for social development will be continued, with some marginal increase in contributions as a proportion of GDP. Since most of the natural resources of the country, including hydro- power, are to be found in the LDRs, these regions will also benefit from the increased emphasis on the development of power and basic industries which will be financed jointly through direct financial contributions from the consuming regions. 16. The new Five Year Plan was prepared according to the self-management principle stipulated in the Constitution of 1974. Self-management planning is perceived as an iterative process of sequential, converging consensus-finding. In the initial stage, broad priorities (as to sectors and activities) and general quantitative targets and constraints (like growth rates of social product and the volume of savings and investment) are determined on the basis of consensus by the Assemblies of the socio-political communities (Govern- ments at the Communal, Republican and Provincial, and Federal levels). Sub- sequently, the planning process starts at the bottom with individual enter- prises and Communities of Interest setting out expectations and targets. The planning process then proceeds through successive and partially overlapping stages of horizontal adjustments within sectors and branches (aimed primarily at eliminating gross duplications), vertical adjustments between closely inter- dependent sectors and branches (aimed at determining realistic orders of magnitudes of production, conceptually within an input/output framework), and regional adjustments between Republics and Provinces (aimed at both horizontal and vertical consolidation). The socio-political communities participate in this process by ensuring observance of the broad priorities, targets and con- straints, and by resolving conflicts which cannot be resolved by the direct participants. The evolving consolidated programs of action, which in their totality constitute the operational portion of the Plan, are codified in the - 7 - form of "Social Compacts" 1/ or "Self-Management Agreements" 2/ which are legally binding for the whole Plan period unless renegotiated in the case of major deviations occurring in the course of Plan implementation. The new Plan differs from the previous one in strengthening and formalizing the commitments for implementation by enterprises, banks and government institutions. Creditworthiness 17. In spite of the recent balance of payments problems, the prospects for Yugoslavia's continued economic growth during the next decade are good. The country's endowment: of natural and human resources, its relatively low dependence on imported primary energy, its pragmatic approach to economic problems and its readiness to undertake institutional changes, combine to give grounds for a favorable assessment of future prospects. Yugoslavia will need to continue to raise foreign capital on a fairly large scale, mostly from established channels such as the Euro-currency market, suppliers' credits and the World Bank. In addition, greater use may be made of credit lines from COMECON countries and the European Community, and efforts are being intensi- fied to open up new sources of capital in OPEC countries. The debt service ratio amounted to abou: 16 percent in 1976 and is expected to level at about 17 percent in 1977 and subsequent years. Taking into account Yugoslavia's debt service record andl the measures taken in the past to control balance of payments problems, as well as the prospective growth of production and struc- tural improvement of tihe balance of trade, Yugoslavia remains creditworthy for a substantial amount of Bank lending. PART II - BANK GROUP OPERATIONS IN YUGOSLAVIA 3/ 18. The Bank has made 50 loans to Yugoslavia totalling about US$1,981 million. Of this amount, approximately 43 percent (US$856.4 million) has been for 17 loans for the transportation sector--9 for highways, 5 for railways, and one each for a natural gas pipeline, an oil pipeline, and a port project. Bank lending has generally concentrated on infrastructure including, in addi- tion to the transportation loans, five power loans, one telecommunications loan, two water supply and sewerage and five multipurpose loans. Five loans 1/ "Social Compacts" regulate broader economic issues or policies and are concluded among Socio-Political Communities and also involving Economic Chambers and Associations of Enterprises and Trade Unions. 2/ "Self-Management kgreements" are more specific and regulate most rela- tions, rights and obligations within, among and between economic organ- izations like BOALs, enterprises and banks. 3/ Substantially unchanged from Part II of the President's Reports for the Third and Fourth Industrial Credit Projects (Report Nos. 2235a-YU and 2360-YU) of June 26, 1978. - 8 - totalling US$206 million (about 10 percent of the total amount lent to Yugoslavia) have been made for agriculture and agro-industries. Twelve loans amounting to US$300 million (about 15 percent of the total) have also been made for industry and two for tourism amounting to US$30 million. The $27 million first Bank loan for air pollution control was approved May 25, 1976. In addition, IFC has made investments in eleven Yugoslav enterprises totalling about US$155 million. Annex II contains a summary statement of Bank Loans and IFC investments as of May 31, 1978 and notes on the execution of on-going projects. 19. The interrelated objectives which the Bank has pursued in its lend- ing to Yugoslavia remain essentially unchanged. These objectives are: (a) to support Yugoslav efforts to address the critical issues of regional disparities and unemployment; (b) to promote agricultural development in both the individual farmer and social sectors by providing basic infrastructure and credit facilities; (c) to encourage structural reforms in the major sectors through improved coordination, institution-building and technical assistance; (d) to help in identifying and financing gaps in basic infra- structure-particularly transport and energy; and (e) to alleviate critical shortages of convertible foreign exchange by providing part of the required long-term capital, encouraging and promoting Yugoslavia's efforts to tap other sources of medium- and long-term capital, and supporting projects which generate or conserve foreign exchange. It is obvious that each and every Bank operation cannot address all these objectives nor be entirely oriented towards the welfare of the less developed regions (LDRs), but the basic thrust of the Bank's activities in Yugoslavia has increasingly been towards the development of the LDRs and the agricultural sector in particular. 20. The Bank's emphasis on assuring the accelerated development of the LDRs is fully in accord with the Federal Government's avowed policy to narrow the gap between the richest and the poorest regions. The new development Plan assigns even higher priority to redressing such disparity, and to that end the Federal Government has now obtained consensus of its constituents, not only on the channeling of domestic resources to the LDRs through the Federal Fund mechanism (see para. 7 of this Report) but also on the distribution of external resources including Bank lending. The Bank has actively cooperated with the Government in evolving a distribution pattern for Bank lending which gives weight to the income levels and population size of particular regions and has on this basis over the last three years effectively directed more than two- thirds of its lending to the LDRs. While the Bank's ability to achieve such a distribution is clearly influenced by the ability of the regions to generate viable projects, recent experience in bringing forward well designed and eco- nomically sound projects for the LDRs is cause for confidence in our ability to maintain the level of Bank activity in the LDRs, though there will undoubt- edly be year-to-year fluctuations. 21. In recognition of the fact that such an expanded investment program for the LDRs would need to be preceded by a systematic survey of these regions to take stock of development potential and identify constraints, the Bank undertook and completed economic surveys of the four LDRs (Kosovo, Bosnia- Herzegovina, Macedonia and Montenegro). These regional surveys, coupled with intensified Bank assistance in project formulation and ongoing economic and sector analysis, reinforce the impact of the Bank's participation in the development of these regions. 22. Over the past several years, more than two-thirds of our lending, as noted in paragraph 20 above, has been to the LDRs. Operations, such as this proposed irrigation project and the recently approved third and fourth indus- trial credit projects, as well as operations envisaged for LDRs over the next two years, including loans for irrigation, water supply and sewerage and multipurpose water resource and agricultural development, emphasize our continuing orientation to the needs of the LDRs. Recently approved loans for a Ninth Highway Project, a Fifth Railway Project and a Middle Neretva Hydro Power Project, as well as the Second Power Transmisson Project approved in 1977, will both assist the LDRs and promote structural reforms in the trans- port and energy sectors. IFC is currently investigating several new invest- ment opportunities to encourage joint ventures which would provide technical, management and marketing expertise as well as long-term capital. 23. The Bank helped formulate the 1973 "Green Plan", a comprehensive framework for agricultural development, which recognized the need to encourage the role of the individual, low-income sector (which holds almost 85 percent of the cultivated land and employs over 90 percent of the farm population). As a follow-up, the 1976 "Green Plan" calls for even greater attention to agriculture and clearly recognizes that the impetus for accelerated growth must necessarily be derived from the underexploited resources of the indi- vidual farming sector. 'It is now generally appreciated that the individual farmer sector can generate significant increases in production if provided with sufficient support in terms of extension services, credit for inputs and basic infrastructural facilities. The loans for the Ibar Multipurpose Project (Loan No. 777-YU) and the Metohija Multipurpose Project (Loan No. 1360-YU) in Kosovo, the first and second Agro-Industries Projects (Loan Nos. 894-YU and 1371-YU) in Macedonia, and the first and second Agricultural Credit Projects (Loan Nos. 1129-YU and 1477-YU, respectively), as well as the proposed project, have given special attention to the needs of the individual farmer sector. 24. The agricultural sector deserves attention for a number of develop- mental considerations. It is the obvious vehicle for addressing the problems of rural poverty which underlies regional disparity; it can provide opportuni- ties for productively employing the rural population, thus reducing the pres- sure for creating non-agricultural employment; and it contributes to reducing - 10 - reliance on imports and improving the prospects for exports of food and other agricultural products. Forthcoming projects for irrigation and rural develop- ment will support agriculture development in general and in particular, the individual farmer sector. 25. Decentralized management, which is the cornerstone of Yugoslavia's socio-economic philosophy, adds to the inherent difficulties involved in for- mulating coherent sector plans. One of the principal features of the 1974 constitutional changes and subsequent legislation, however, has been to revamp the institutional framework and to introduce mechanisms for coordination. The new system of self-management planning requires that the programs of all enter- prises are discussed, negotiated and reflected in legally binding agreements. In order to support these efforts for improved coordination, the Bank intends to pursue vigorously the initiatives it has sponsored in terms of establishing the basis for evolving coherent sector policies. 26. Given the complexity of the Yugoslav system, which requires reaching a consensus of all parties affected by any substantive decision, the process of dealing with problems and of evolving acceptable solutions is cumbersome. The Bank sees it important, however, to continue exerting its influence in shaping the policy framework and having a further beneficial impact on foster- ing coordination, particularly in the power and transport sectors where significant progress has already been achieved. For instance, the Eighth Highway Project (Loan No. 1377-YU) approved March 15, 1977, provides for studies of road-user charges and railway costs which the Government and we believe essential for developing intermodal coordination and devising a policy framework for the transport sector. The Second Power Transmission Project (Loan No. 1469-YU approved June 28, 1977), an extension of the interconnected transmission system partly financed by the Bank in 1972 (Loan No. 836-YU), will enable the supply of power throughout the country and thereby encourage power exchange coordination among all republics/provinces. The promise of further progress in the coming years is reassuring and additional improvements in sector coordination and policy are foreseen in conjunction with upcoming projects. 27. A persistent foreign resource gap looms as the major impediment to Yugoslavia's ability to maintain its growth momentum and ability to address the critical issues of unemployment and regional disparities. While the Yugoslavs are making concerted efforts to open up and enlarge access to Western finan- cial markets and institutions (including the European Investment Bank), there is no concrete evidence of substantial additional inflows. The Bank, there- fore, remains the major source of long-term external capital for the foresee- able future, and its significant level of operations in Yugoslavia not only constitutes the largest source of long-term external capital but, equally important, is regarded by international financing institutions as evidence of international confidence in Yugoslavia's economic performance, policies and prospects. In financing of infrastructure as well as industrial and agro- industrial projects, we continue to devote particular attention to possibili- ties for attracting co-financing. In our support of projects in the directly productive sectors, we have and will continue to devote attention to those which generate or conserve foreign exchange. - 11 - 28. Yugoslavia's debt to the Bank amounts to about one-fifth of its total public debt, outstanding and disbursed. The outstanding debt to the Bank is, however, expected to decline gradually from its current level to about 10 percent of Yugoslavia's total external debt. Service on Bank loans as a proportion of total debt service was 4.7 percent in 1976 and is projected to be about 5 percent by 1980. PART III - THE AGRICULTURAL SECTOR Agriculture in Yugoslavia 29. The agriculture sector grew at an average rate of about 3 percent during 1970-75, occupied about one-third of the Yugoslav population and accounted for around 15 percent of the GMP (Gross Material Product) 1/. In view of continuing rural poverty and emerging food deficits, increasing emphasis is being placed upon accelerating agricultural development. The 1976-80 Plan projects an increase in the growth rate to about 4 percent over the period. 30. The country hbas three distinct climatic zones and a predominantly mountainous terrain. Agricultural activities are consequently varied, rang- ing from cultivation of wheat, maize and sugar beets in the fertile plains, to livestock rearing in the upland pastures, and cultivation of sub-tropical crops and fruits along the Adriatic Coast and in the catchment basin of the Aegean Sea. 31. An important feature of Yugoslav agriculture is the co-existence of social and individual sectors. The social sector, which grew out of postwar collectivization, operattes under principles of social ownership of the means of production and workers' self-management. It includes kombinats (integrated farms and processing faLcilities), cooperatives and research institutions. This sector produces one-third of total agricultural output, controls 15 percent of agricultural land, and employs about 6 percent of agricultural man-power. In contrast, the individual sector, which owns 85 percent of the cultivated land and employs over 90 percent of agricultural manpower, is handicapped by small, fragmented and poor quality landholdings, and has been neglected in terms of access to basic infrastructure, financing and techn- ology. The Government now recognizes that further significant growth in production will have to emanate from the individual sector, and has launched programs in agricultural credit and extension, cooperation with the social sector and marketing services. 1/ GMP (Gross Material Product) corresponds to GDP (Gross Domestic Product) less output of certain services, such as public administration, defense, education, health and social insurance. - 12 - 32. Responsibility for formulating agricultural policy rests with the republics and provinces, all of which are represented on the Federal Committee for Agriculture, the President of which is a member of the Federal Executive Council with the rank of Minister. The Committee sets the principles for development, establishes major policies, links the agricultural sector with the overall national development plan and is responsible for coordination of agrarian policy, legislation and prices and exports. There is also at the Federal level the Federal Chamber of Economy, within which there is a unit dealing with the agricultural sector which includes specialized committees. The responsibilities of these committees are to promote coordination in such specialized areas as research, planning and finance. The Federal Chamber of Economy attempts to ensure overall coordination within the economy. Chambers of Economy also exist at the republican/provincial levels; like the Federal Chamber of Economy, they comprise social sector enterprises and, as such, seek to achieve maximum self-management coordination among and serve as intermedia- ries between enterprises in the negotiation of "social compacts" within their respective republics/provinces. They also examine all legislation to be placed before the respective assemblies, forecast markets, provide economic services and scrutinize plans of enterprises. At the local level, the commune is the link between the community and enterprises, and seeks to reconcile the various interests of the enterprises and the community. 33. Due to decentralized decision making, all functions associated with policy implementation rest with autonomous self-governing organizations, such as kombinats and cooperatives, which implement production and investment plans. Even though it accounts for only about 15 percent of total cultivated land, the social sector is the primary medium for policy implementation regarding production and investments, since it has a virtual monopoly of technicians, management skills and production processing and marketing activities outside the small-scale sector. Agriculture in Macedonia 34. Macedonia is one of the less developed republics of Yugoslavia with an estimated per capita income approximately 70 percent of the national aver- age or about US$1,050. Agriculture contributes 23 percent of the total GMP of Macedonia, and absorbs 32 percent of the active working population. Though agriculture's role has been declining relative to the rest of the economy with the rapid progress of industrialization, it remains an important sector. Agricultural production expanded at an average annual rate of 3.6 percent in Macedonia between 1966 and 1977. Fruit and vegetable production grew most rapidly, largely by area extension, encouraged by the rising relative prices and increased availability of irrigation facilities. With the increase in employment opportunities in the industrial sector the active agricultural population declined by 1.5 percent annually in Macedonia between 1961 and 1971. The net result of production growth and labor force decrease was increasing labor productivity by an average annual rate of about 4.5 percent. From 1971 to 1975 agricultural employment increased by about 4.5 percent per year, accompanied by a decline in productivity. However, unemployment and underemployment remain high, relative to national averages. Lack of employ- ment and income opportunities in the rural sector had caused widespread - 13 - emigration of the rural population to the cities or to work outside Yugoslavia. The emigrating population mostly consisted of young able-bodied persons and has acted as an impediment to full exploitation of agriculture in the indi- vidual sector. Recently there is a trend for migrant workers to return to Yugoslavia (see paragraph 8). Increased income opportunities in individual sector agriculture would help absorb the returning migrant labor, slow down emigration and help them to settle on farms. 35. Mountainous terrain covers 75 percent of Macedonia. These areas are unsuitable for field crop production, but extensive upland pastures support sheep and cattle. The plains and valleys suitable for cultivation produce grain, vegetables and fruit. However, expansion and replacement in the processing industry has not kept pace with the expansion of fresh vege- table production, and the share of Macedonia in Yugoslavia's total processed vegetable production has declined from about 25 percent in 1960 to 15 percent in recent years. 36. In 1975, the social sector held 20 percent of Macedonia's cultivated land, employed 8.8 percent of the agricultural labor force, produced 30 per- cent of the agricultural product, and contributed 45 percent to the Republic's marketed agricultural production. Social sector agriculture recorded an average increase in production above 9 percent annually between 1965 and 1975, about triple that of the individual sector. The main explanations for rapid growth of social sector agriculture are: (a) concentration in this sector of more than two-thirds of the gross fixed investment in agriculture in the postwar period, (b) "intellectual input" by university-trained workers, and (c) emphasis on research. 37. The individual sector in Macedonia occupies by far the larger part of cultivated land and employs more than 90 percent of the total agricultural labor force. It consists of about 160,000 private holdings with an average size of 3.1 ha. The average income per capita of the individual farmer was about Din 4,700 (US$260) in 1976. On average about 50 percent of the income of these farmers is derived from their own land and the rest from outside employment. It is estimated that 80-90% of the individual farmers earn less than the relative poverty income level (US$350 in 1976 dollars in Yugoslavia). Production in the individual sector has fallen far below the performance of the social sector, and there is an increasing productivity gap between the two sectors. The major causes of low productivity and yields in the individual sector are: (a) low qua'Lity of land remaining in private hands; (b) the small share of private land under irrigation; (c) use of inferior varieties of seeds, plants and animals; (d) low degree of mechanization; (e) low fertilizer input; and (f) statutory limitations on farm size and scattered holdings. However, with increasing cooperation between the individual and social sectors, some of these constraints are being reduced. 38. The individual and social sectors are for the most part complementary as well as competitive. Labor-intensive crops, such as vegetables and tobacco, are almost exclusively produced in the individual sector, which also has 95-98 percent of the cattle and 92-99 percent of the sheep. Cooperation between the sectors consists of trade in inputs and output; provision of services by the - 14 - social sector such as supply of fertilizers, mechanization, marketing and credit and the contracting of joint production. While such cooperation brings benefits to the individual farmers who due to their geographical proximity can establish such relationships with the social sector, it does not embrace individual farmers who are isolated. In addition, the increasing importance of off-farm income for certain farmers and the dissemination of new production techniques in the individual sector make contract cooperation less attractive for some. However, for the individual sector as a whole expanded cooperation is the key to its development and is being increasingly encouraged by the Government and supported by Bank operations. 39. As elsewhere in Yugoslavia, Macedonia has "organized" markets with "authorized purchases" by social sector enterprises and "informal" markets where peasants sell directly to consumers. The importance of the organized markets is relatively high in Macedonia because large parts of the individual sector's production is sold to other parts of Yugoslavia or exported. Agriculture Policy in Macedonia 40. The basic objective of Macedonia's 1976-80 Agricultural Development Plan is to raise the production of agricultural crops to meet expected domestic needs and to allow for some exports by emphasizing (a) the further development of the social sector through modernization of production techniques, expansion of processing facilities, better utilization of available resources and the adjustment of production to changes in demand, and (b) the development of indi- vidual sector farms primarily through cooperation with the social sector. Implementation will be achieved through (a) price policies, (b) investment policies, and (c) support for cooperation between the social and individual sectors. 41. Annual total investment in agriculture is expected to reach about US$83 million in Macedonia, more than a 50 percent increase against the previous Plan period, of which 13 percent (compared to 8 percent for the pre- vious Plan period) would be in the individual sector. Special incentives encourage mobilization of enterprises' own resources--income tax rebates for agricultural investments, turnover tax exemptions, interest rate subsidies for investment credits, reduction of import duties on agricultural machinery and increase in the foreign exchange retention quota from depreciation charges. 42. The Agricultural Development Plan represents a significant step for- ward by focussing on specific problems of individual farmers; however, top investment priority is accorded the social sector for irrigation, land devel- opment and processing facilities. Continued importance is given to the social sector as the leader in agricultural development and as a catalyst in stimul- lating increased production from the individual sector. Specific measures for the promotion of the individual sector are: (a) increased cooperation between the two sectors, (b) establishment or improvement of extension services to achieve a more rapid transfer of modern technology, and (c) credit for on-farm investments. - 15 - Water Development in Macedonia 43. Autonomous water management organizations are responsible in Yugoslavia for irrigation development, flood control and stream regulation. While these organizations primarily serve agriculture, some are also involved in domestic and industrial water supply. However, public water supply is usually the responsibility of local towns and communes, which establish water departments for the construction, operation and maintenance of water supply systems. In the project area the water management organization, Vodostopanstvo, began drainage and flood control activities in the 1950's, while the municipal water department of Bitola, the principal town in the project area, has respon- sibility for public baths and delivery of water for domestic and industrial uses. Bank Involvement in Yugoslavia's Agriculture Sector 44. It has been part of the Bank's strategy in Yugoslavia for some years to find ways of assisting with the development of agriculture, with a special emphasis on helping the individual farmer. The 1973 Plan as revised in 1976, provides a suitable fraraework for Bank lending, since it aims, by explicitly supporting the individual farmer sector, to promote more even income distribu- tion within the sector. 45. The proposed Macedonia Strezevo irrigation project (about 60 percent of which is directly involved with the individual sector) would represent the seventh Bank loan for agriculture and agro-industries in Yugoslavia, following the First Agro-industries Project in Macedonia (Loan No. 894-YU) in 1973 (pri- marily involved with the social sector), the First Agricultural Credit Project (Loan No. 1129-YU) in 1'975 (about 47 percent of which is directly involved with the individual sector), the Metohija Multipurpose Project (Loan No. 1360-YU) in 1977 (primarily involved with the individual sector), the Agriculture and Agro-industries Projects for the Republics of Montenegro and Macedonia (Loans Nos. 1370-YU and 1371-YU, respectively), the first primarily involving the social sector and the second having significant involvement in the individual farmer sector, and the Second Agricultural Credit Project (Loan No. 1477-YU) in 1977 (about 57 percent of which is directly involved with the individual sector). Other Bank loans for multipurpose projects have included agricul- tural components; such as, irrigation works under the Ibar Multipurpose Project (Loan No. 777-YU) of 1971 and two pilot irrigation projects under the Morava Region Development Project (Loan No. 1262-YU) of 1976, both involving primarily individual sector farmers. These projects, the progress of which is summarized in Annex II, are proceeding satisfactorily. The mix between involvement in the social and individual agricultural sectors in Bank projects in Yugoslavia has been determined in each particular case by the Federal and Republican/Provincial Governments' own efforts for the social and individual farmer sectors and the high priority attached to the specific agricultural production and processing schemes. - 16 - Performance Under First Agro-Industries and Agricultural Credit Projects in Macedonia 46. The objective of the First Agro-Industries Loan made to Stopanska Banka Skopje (SBS) in 1973 (Loan No. 894-YU) was to assist in financing part of Macedonia's agricultural development program relating to investment in the social sector (livestock, agro-industry, vineyards, storage and fish ponds) and the individual sector (farm mechanization, plantation, livestock and vegetable production). The program experienced delays primarily caused by procurement problems and cost overruns but has otherwise been generally achieved up to the Bank's expectations and appraisal report estimates. All loan funds (US$31 million) under the project have been committed and most will have been disbursed by December 1978, about 6 months later than estimated in the appraisal report, except for the final subproject scheduled for completion in mid-1979. Under the Project, the appraisal procedures of SBS were stream- lined and its appraisal reports of sub-projects have shown improvement. Greater attention still needs to be focused, however, on management informa- tion systems, regular supervision and adequate review and provision for effects of inflation on costs; problems which are being addressed under the Second Agro-Industries II Project (Loan No. 1371-YU) in 1977. Three studies were undertaken in the project to provide a clearer understanding of individual farm operations and productivity improvement opportunities, marketing pros- pects for agricultural products and further needs and benefits of various irrigation schemes. The marketing and small farm credit studies contributed to the development and appraisal of the Second Agro-Industries II Project. The irrigation study provided a review of Macedonia's long range irrigation requirements which contributed to the development of the proposed project. 47. Additional experience has been gained by SBS under the Bank's First Agricultural Credit Project in Yugoslavia in 1975 (Loan No. 1129-YU), the objective of which is to make funds available to participating banks in each republic and province for lending to social sector enterprises and individual farmers. The funds from this loan support the objectives of the agricultural development plans to increase production, improve product quality, and raise productivity and income, especially on private farms. Stopanska Banka's performance in terms of commitment and disbursement is above the average reported for the project as a whole. After a slow start, including delays in the appointment of a procurement specialist to the staff of SBS and in obtaining a consultant to review the market center study, implementation is proceeding satisfactorily on the Second Agro-Industries Loan made to SBS in 1977 (Loan No. 1371-YU), as well as on the Second Agricultural Credit Project to Yugoslavia in 1977 (Loan No. 1477-YU) under which SBS is one of the bor- rowers. PART IV - THE PROJECT 48. Reclamation of the Pelagonija swamps from 1958 to 1963 provided the largest single area of arable land in Macedonia, one of Yugoslavia's less developed republics, for development of irrigated agriculture. The entire - 17 - plain was divided into five potential regions for development of land and water resources; of which Strezevo is one of the largest. In its present form, the project evolved f-rom a number of studies carried out for the Gov- ernment of Macedonia beginning with a feasibility study by Yugoslav consul- tants in 1971. Provisions were included in the first Macedonia Agricultural Industries Project (Loan 894-YU) for consultants to review irrigation require- ments for the republic. Based on the findings of this overall study, the Government accorded the highest priority on developing the Strezevo irrigation system. Initial project preparation was begun in 1975 by the FAO/IBRD Coopera- tive program and was followed up intensively by the Bank. Energoprojekt, a Yugoslav consultant, with l:he help of other consultants, prepared a project preparation report of March 1977 for use by Bank preappraisal missions during May to September 1977. A special technical feature of the project is opera- tion of sprinklers through gravity pressure. The project was appraised in October/November 1977. Negotiations were held in Washington in April 1978. The Yugoslav delegation was headed by Mr. Vasil Tudzarov, Vice-President of the Executive Council of Macedonia. Annex III contains supplementary project data. Project Objectives and Description 49. The project is described in detail in the Staff Appraisal Report "Macedonia Strezevo Irrigation Project", Report No. 1934a-YU, dated July 14, 1978 which is being distributed separately to the Executive Directors. 50. The project is designed to increase crop production on 20,300 ha, to raise labor productivity and income, to create employment in an area where unemployment and emigration are among the highest in Yugoslavia and to promote self-sufficiency in food production. Other elements include supplying bulk water to the Bitola water authority and to a thermal electric power plant cur- rently under construction. Institution building activities include expanding and upgrading the operation of the project authority, Vodostopanstvo, and strengthening Stopanska Banka Skopje (SBS) in financing agricultural develop- ment. Also included are feasibility and preparation studies for three pos- sible future irrigation projects, which would be an extension of the review of Macedonia's long-range irrigation requirements and preliminary feasibility work carried out under the First Agro-Industries Project. 51. The project is designed to provide for the construction of (see Map): (a) the Strezevo dam (rock fill with clay core) on the Semnica River with a storage capacity of 112 Mm3; (b) a 62 km alimentation canal tapping seven streams from the Baba Mountains; (c) a 45 km main canal for delivering irrigation water; (d) a gravity-fed sprinkler irrigation network; (e) surface drains; (f) maintenance and administration buildings; (g) access roads; (h) a pipeline for the thermal plant from intake site; and (i) bulk water supply for domestic and industrial consumption. Project Implementation 52. Institutional Arrangements. The proposed loan would be channeled through SBS, the borrower. The Agriculture Operations Department of SBS would be responsible for coordinating disbursements. It has sufficient expertise in - 18 - agriculture, livestock, irrigation and economic and financial analysis areas to supervise the project. 53. SBS plays a prominent role in mobilizing invesiment resources in Macedonia. As in the rest of the country, this regional bank assumed its present form through mergers of commercial and investment banks. SBS is not the only bank operating in Macedonia--banks from other regions have branch offices there--but it dominates in financing investments in the republic. SBS acquires its resources from private and enterprise savings, borrowings from the National Bank and to a lesser but still important extent, from foreign credits. Most Federal funds and regional resources are channeled through SBS. SBS operates as a mixed commercial/investment bank and its loan accounts are fairly evenly distributed among enterprises in all sectors of the economy, indicative of a reasonably diversified loan portfolio. An important part of SBS' current loan operations deal with the agricultural sector (short- term loans: 12.4 percent and long-term loans: 8.5 percent). SBS is the major source of credit to the agriculture sector in Macedonia. The total assets of SBS as of mid-1977 were US$2.5 billion. The financial structure and performance of SBS is satisfactory, keeping in view that it has close ties with the republic's economy, both in funding and lending operations, and merely seeks to earn sufficient revenues to cover all its expenses and financial obligations. Any surpluses that might accrue are returned to the member enterprises as dividends or are transferred to the founders' fund or the bank to be used to supplement the bank's lending resources. SBS has been a borrower under six previous Bank loans, including two agro-industries projects, two agricultural credit projects and two industrial credit projects (see paragraphs 45-47). 54. The execution and implementation of the project would be entrusted to Pelagonija Water Economy Enterprise, Bitola, (Vodostopanstvo), which is a financially autonomous enterprise, headed by a workers' council, an executive committee and a general director. It has successfully completed a large drainage project in the area, as well as flood and torrent control projects. The overall responsibility for planning, construction and maintenance of all project works would rest with Vodostopanstvo. It would finalize designs, prepare and evaluate the bids, and coordinate construction on all components of the project. With suitable strengthening of its staff and consulting assistance (discussed below), Vodostopanstvo is competent to execute and operate the Strezevo Irrigation project. The Bank would sign a project agreement with Vodostopanstvo, the subborrower, which would detail its responsibilities (see Strezevo Project Agreement). A separate project unit (BOAL Strezevo) organized as a basic organization of associated labor (BOAL-see paragraph 5), would be established within Vodostopanstvo having as its sole and exclusive responsibility the implementation of the project and the operation of the system after its completion. BOAL Strezevo would be headed by a director and would have four separate divisions: exploitation, financial, technical, and general and legal affairs. Assurances were obtained that Vodostopanstvo would establish BOAL Strezevo under arrangements satis- factory to the Bank and appoint a qualified and experienced director prior to effectiveness of the proposed loan (Strezevo Project Agreement, Sections 2.01(b), 3.02 and Schedule 2; Loan Agreement, Sections 7.01(d) and 7.01(e)). The director designate of the BOAL Strezevo participated in the negotiations. - 19 - Assurances were also obtained that Vodostopanstvo would by December 31, 1978 appoint other key staff, appropriately qualified and experienced (Strezevo Project Agreement, Schedule 2). It has also been agreed that the current staff of Vodostopanstvo would be strengthened and a qualified and experienced financial director with suitable accounting staff would be appointed prior to the effectiveness of the proposed loan (Strezevo Project Agreement, Section 3.02 and Loan Agreement, Section 7.01(d)). 55. Vodostopanstvo, reporting directly to SBS, will be responsible for coordination of all project activities in conjunction with BOAL Strezevo and its four divisions. It will prepare annual work programs for each division, assess physical progress, prepare progress reports for submission to the Bank on project status, identify project bottlenecks and initiate such consultation with the Republic of Macedonia, the Commune of Bitola (the town and surrounding region under whose jurisdiction the project area is located), SBS and the Bank as may be necessary. The Bank would enter into a separate project agreement with the Republic of Macedonia regarding its various undertakings concerning the project (see Macedonia Agreement). The Commune of Bitola would be a signatory to the Strezevo Project Agreement, in which its various undertakings related to the project (discussed below) would be set forth. 56. Implementation, Operation and Maintenance. Reponsibility for designs and procurement would rest with Vodostopanstvo while the implementa- tion and supervision of construction would be more directly the function of the BOAL Strezevo. Qualified and experienced local consultants satisfactory to the Bank have completed preliminary and some final design of the project. These consultants would complete final design, prepare and evaluate bid documents and supervise construction. Vodostopanstvo has agreed to retain specialist consultants, most likely foreign, to review final design of the irrigation pipe network and assist in preparing tenders (Strezevo Project Agreement, Section 2.02(a)). Vodostopanstvo would undertake inspections of the dam and appurtenant structures at intervals of no more than five years and copies of each inspection report would be sent to the Bank (Strezevo Project Agreement, Section 3.04(b)). Extensive geological investigations have been made at the dam site and reviewed by a reputable consultant and foundation stability problems are urnlikely to arise; nevertheless, because of the past seismic history of the region Vodostopanstvo has agreed that a board of independent experts wouldl be appointed, prior to the effectiveness of the proposed loan, under terms and conditions satisfactory to the Bank to advise in the event of major unforeseen problems arising during project execution (Strezevo Project Agreement, Section 2.02(b) and Loan Agreement, Section 7.01(g)). Construction on the diversion tunnel and access roads has begun and completion of the project is scheduled for end 1981. 57. Vodostopanstvo would prepare annually an implementation plan of operation for the system including projected cropping patterns, schedule of movement of portable spri.nkler equipment and deployment of labor (see para- graph 66 below). In addition, Vodostopanstvo would prepare a detailed plan regarding the operation, maintenance and replacement of portable irrigation equipment in the individual farm sector. These plans would be subject to review by the Bank (Strezevo Project Agreement, Section 3.05). Due to the - 20 - size and complexity of this project, Vodostopanstvo has agreed that it would not undertake any other major project or activity which would adversely affect the completion of this project (Strezevo Project Agreement, Section 3.03). 58. The success of the project requires participation of the individual farmers in changing husbandry practices and cropping patterns to realize the potential offered by irrigation of their small holdings. The Government of Macedonia and the Commune of Bitola have delegated the responsibility of coordinating irrigated agriculture in the individual sector in the project area to Vodostopanstvo. The managerial and technical skills required by Vodostopanstvo for these operations will be acquired through a program of technical training for key personnel which Vodostopanstvo has agreed to submit for review and approval of the Bank by July 31, 1979 (Strezevo Project Agree- ment, Section 2.08). The Government of Macedonia, assisted by suitably qualified and experienced consultants, would carry out by December 31, 1980 the irrigation feasibility studies (Macedonia Agreement, Section 2.05). Cost Estimates and Financing Plan 59. The total estimated cost of the project is US$188.8 million. The estimate includes duties and taxes (about 8 percent of project costs) and average allowances for physical contingencies of about 9 percent. Average price contingencies or estimated price increases of about 9 percent per annum have been included in project costs to meet expected inflation in foreign and local costs during the project implementation period. The foreign exchange costs for the project are estimated at US$69.7 million and include estimates of the foreign exchange component of internationally and locally bid contracts expected to be won by Yugoslavs (see paragraph 71). Interest during construc- tion on the proposed Bank loan would add an additional US$12.9 million to the foreign exchange required for the project. Details of the cost estimates are shown in the Loan and Project Summary. 60. The proposed Bank loan of US$82 million would finance almost the en- tire estimated foreign exchange cost of equipment and materials, civil works, and engineering services and the interest and other charges on the Bank loan during construction or 44 percent of the total cost. Financing of interest during construction on the Bank loan, 3 1/2 years, is justified by the finan- cial requirements of the borrower and beneficiary. The projected cash flow for the project indicates that without the inclusion of such interest during construction financing of the Bank loan, the cash flow position of the bene- ficiary and those of the borrower during the period of construction would be imprudently stretched in meeting their obligations including servicing of the proposed Bank loan. The Bank loan would have a term of fifteen years, includ- ing three years grace, with interest at 7.9 percent per annum. The Bank loan would be made to SBS who would enter into a subsidiary loan agreement, on terms and conditions satisfactory to the Bank, to on-lend the proceeds to Vodostopanstvo with the same amortization and grace period as the Bank loan, but with 0.5 percent spread on the on-lending interest rate to cover admini- strative costs (Loan Agreement, Section 3.01(b) and Schedule 4). - 21 - 61. Other sources of financing for the project include a loan from SBS (42 percent or US$80.1 million; US$67 million of which is from funds made available to SBS from the Federal Fund referred to in paragraph 7 of this report), a grant from the Republic of Macedonia (6 percent), and equity con- tributions from enterprises in the Commune of Bitola (8 percent) (Loan Agree- ment, Section 3.01(b); Macedonia Agreement, Section 2.03; Strezevo Project Agreement, Section 5.01). SBS would also finance any cost overruns that may occur (Loan Agreement, Section 3.01(a)). A quarterly disbursement schedule regarding the grant and equity contributions would be undertaken (Macedonia Agreement, Section 2.03 and Strezevo Project Agreement, Section 5.01). The finalization of all financial arrangements would be a condition of effective- ness (Loan Agreement, Section 7.01(a),(c) and (f)). The foreign exchange risk on the Bank loan would be borne by Vodostopanstvo. SBS would in turn take adequate steps to protect: itself against the foreign exchange risk on funds accruing to it from Vodostopanstvo's sub-loan repayments before they are needed to make amortizat-ion payments on the Bank loan (Loan Agreement, Section 5.06). Markets 62. Agricultural produce from the project area is marketed locally in peasant markets in which prices are not controlled by government, and through social sector enterprises engaged in food processing and, on a limited scale, sale of fresh produce in distant centers and abroad. Demand for fresh produce is expected to increase in the project area with rising incomes and with a greater variety of vegetables available regularly in the local market. Most of the area's incremental production will be absorbed by local processing facilities to utilize present excess capacity or to replace produce brought from beyond the project area and transported to factories over considerable distances. Assuming no expansion in local processing capacity, the projected 1990 output of project area farms would exceed potential local demand only for sugarbeet, tobacco, vegetables, grapes, other fruit, and milk. Accordingly, social sector enterprises dealing in these commodities have expansion plans at various stages of preparation. In addition, the republic would ensure that complementary investments at the farm level and in transport and processing would be made available to meet the increased agricultural production in the project area. Cost Recovery and Financial Analysis 63. Users of the water of the three project components, i.e., farmers, Bitola Water Authority (Vodovod) and thermal power plant (Electrostopanstvo), agreed through a series of water user agreements on a system of water quantity deliveries and charges. These agreements were negotiated among all the parties concerned, with village assemblies representing farmers, and are based on ability-to-pay criteria as well as a concern that construction and Operation and Maintenance (O&M) costs be borne largely by direct beneficiaries. It was further agreed that irrigation charges would be phased in by gradual increases to the full rates as agricultural production approaches full development (Strezevo Project Agreement, Section 3.06(c)). In addition, cost recovery analysis will be undertaken by Vodostopanstvo in consultation with the Bank - 22 - prior to the first water deliveries so that rate or other adjustments may be recommended for consideration of the parties to the water user agreements (Strezevo Project Agreement, Section 3.06(c)(ii)). The finalization of these water user agreements would be a condition of effectiveness (Loan Agreement, Section 7.01(h)). The proposed irrigation charges would enable Vodostopanstvo to recover 100 percent of O&M costs and 28 percent of the capital investment costs over 60 years of project life. The cost recovery index would be 91 percent for the entire project, including revenues from sales of bulk water. 64. With irrigation, average per capita income for individual sector farmers would increase from US$260 to US$750 after water charges. The propor- tion of farmers above the relative poverty level would increase from the current 10-20 percent to 85-95 percent. In the social sector, returns to agricultural labor would at least double at full development, providing these workers substantially more than the relative poverty level income. 65. Most of the project would be financed by loans from IBRD and SBS. The repayment terms are 15 years (including 3 years of grace) on the Bank loan, 20 years (including 4 years of grace) on the funds SBS has obtained from the Federal Fund (see paragraph 61) and 10 years (including 4 years of grace) on SBS's own funds. During the period before irrigation charges are fully phased in Vodostopanstvo's financial position will be characterized by proj- ected cash flow deficits during the first four years, which the Commune of Bitola and the republic have agreed to cover through the provision of addi- tional funds on terms and conditions acceptable to the Bank (Macedonia Agree- ment, Section 2.04 and Strezevo Project Agreement, Section 5.02). At full development (1987) Vodostopanstvo is expected to be able to generate enough funds to cover O&M costs as well as debt service and all of its other finan- cial obligations. Land Use Rationalization 66. Land use rationalization for the application of irrigation water will not require changes in land ownership since the present legal and customary basis for land use rationalization in Macedonia is adequate to deal with essential issues of access, mechanization, mutual assistance and marketing of crops and equitable distribution of costs and benefits essential to the successful implementation of the project. In the social sector, land use planning is a routine element of farm management, and cropping patterns and input proportions will be changed quickly and easily to incorporate the advantages of irrigation. In the individual sector, changes in land ownership to create the 6 ha blocks appropriate to system design, around each hydrant, are not feasible because of institutional limitations. However, the tradition of land use cooperation is well developed in the project area so that numerous small, unfenced plots are worked on a compatible and convenient basis. Irri- gation planning and portable equipment use will be incorporated into the same farmer cooperation mechanism which now handles voluntary grouping for contract cultivation, use of hired services, and to facilitate access to economies in marketing. Local farmers would continue to make key decisions on a group basis, with decision-making focused on 6 ha irrigation blocks. Oversight of land use rationalization will rest with Vodostopanstvo, which each year must - 23 - by law present to the Bitola Commune Assembly an implementation plan for land and water use, including a cropping plan, for the following season, based on plans of social sector agricultural enterprises and decisions reached by farmers on a village or smaller land unit level. The legal basis of Vodostopanstvo's obligaition is found in 1976 Macedonian legislation and enabling provisions passed by the Bitola Commune Assembly in 1977 (Macedonia Agreement, Section 2.01 and Strezevo Project Agreement, Sections 3.05 and 5.03). Agricultural Extension 67. Agricultural extension services in the project area are provided primarily by the social sector, although two Government funded agencies assist in serving the individual sector. The agro-industrial kombinat responsible for social sector land in the project area maintains its own research estab- lishment and employs a variety of technical experts to deal with various aspects of farm management and husbandry practices. The kombinat's coopera- tive centers which supply inputs and services to private farmers also provide extension advice. Social sector processing factories maintain extension agents concerned with specific crops grown by individual farmers on a contract basis. The intensity of extension coverage will increase from one agent for 140 ha in the individual sector at the time of appraisal to one for 80 ha at full development. Processing facilities will continue to provide the largest share of extension support for individual farmers. Water Rights 68. The Semnica Reka and Baba mountain streams, from which a substantial portion of water for the project would be drawn, flow into the Crna Reka, which in turn flows into the Vardar River, which flows through Greece. The seasonal nature of the flow of the Semnica Reka and Baba mountain streams is such that water for project use would be drawn primarily during the winter and stored for summer use; hence, this would not adversely affect the summer flow of the Vardar River. The Vardar River is the subject of agreements governing riparian rights between Yugoslavia and Greece. The Government has submitted to the Bank a statement that the proposed diversions for the project comply with the agreements and a statement by the Greek Government acknowledging that they have been duly notified of the proposed works and that the works meet with their agreement. Accounts and Audit 69. As required by Yugoslav law all banks and enterprises are audited annually by the Social Accounting Service (SAS). Normal audit by SAS which is limited to verification of cash balances and checking of financial statements for mathematical accur;acy and comparisons with previous years does not conform to generally accepted international standards. SAS has implemented a training program for its staff with the Bank's support, to undertake internationally accepted audits of Yugoslav banks including SBS. A full unqualified audit report on SBS for 1976 was produced by SAS following generally accepted standards. Full audits with audit opinion are expected within two to three - 24 - years as per schedule agreed under the Second Industrial Line of Credit (Loan No. 1277-YU). 70. Vodostopanstvo would require BOAL Strezevo to establish appropriate record keeping and reporting procedures. BOAL Strezevo would maintain sepa- rate accounts for all financial transactions under the project and would submit annual reports audited by SAS, and acceptable to the Bank, within four months of the end of the fiscal year. Vodostopanstvo would also recruit qualified accounting personnel able to handle the requirements arising from the project, including the appointment of a qualified and experienced financial director (see paragraph 54). Procurement and Disbursement 71. Contracts for civil works and equipment would be grouped to the extent practicable into 10 contracts and procured in accordance with the Bank Guidelines for Procurement. Of these, 5 contracts totalling about US$152 million would be procured by Vodostopanstvo under international competitive bidding (ICB), under the supervision of SBS including a major equipment con- tract of about US$11 million for sprinkler irrigation equipment. Of these lots, with minor exceptions, it is expected that due to the competitiveness of the Yugoslav contracting industry, only the supply of the sprinkler irrigation equipment is likely to be awarded to a non-Yugoslav contractor. In assessment of equipment bids, Yugoslav manufacturers would receive a preference of 15 percent or applicable duties, whichever is the lesser. Procurement in accord- ance with local competitive bidding, following Government procedures which are acceptable to the Bank, is appropriate for the remaining five contracts totalling about US$6 million, of which US$4.9 million for the diversion tun- nel, access roads and power plant pipeline has been procured through advance contracting in order to enable construction to begin during the 1978 season and avoid serious delays in project implementation. The Bank has reviewed the bidding documents, bid evaluations and contract awards on these three items and retroactive financing is recommended for expenditures of about US$700,000, which are expected to be incurred by Vodostopanstvo prior to loan signature. 72. Bank disbursements would extend over about four years. An estimated disbursement schedule is given in the Loan and Project Summary. Disbursement of the proposed Bank loan would be made against 33 percent of the total cost of civil works, equipment, vehicles and buildings, 100 percent of the foreign or ex-factory price of locally manufactured equipment expenditures for the sprinkler irrigation system and 100 percent of consultant services. Disbur- sements would also be made against 100 percent of interest and other charges during construction on the Bank loan. Benefits and Risks 73. The proposed project would increase agricultural production on 20,300 ha by providing irrigation water and certain supporting services, enabling a more than five-fold increase in net farm incomes to about Din 560 million a year after water charges. The project would benefit directly about - 25 - 5,500 individual farm families and 3,600 families in social sector agricul- ture and processing. Social sector wages are projected to double with the project, while the average per capita incomes of individual farmers are expected to increase in a range of from more than 2 to more than 6 times, depending on farm type. Increases in output, accompanied by a movement towards high value crops requiring labor intensive cultivation, will permit more efficient utilization of existing processing capacity and provide the basis for selective expansion of agroindustry in and around the project area. In addition to its employment generating aspect, the project will permit the realization of greater self-sufficiency in food in the project area, Macedonia and Yugoslavia, as well as providing limited incremients to export potential for fresh produce, small leaf tobacco and beverages. Institution building aspects include strengthening the local water management authority (Vodostopanstvo), deepening the borrower's (SBS) involvement in the agri- cultural sector, and increasing linkages in the agricultural sector by giving more individual farmers the means and incentive to supply produce for social sector processing industries and marketing channels. In addition, the poten- tial for land exploitation may be enhanced by the increases in land values expected to result from provision of irrigation at a charge which does not fully exhaust the estimated level of rent. Minor project benefits include a slight increment in flood control protection in the project area; the supply of sufficient quantities of bulk water to the municipal water authority of Bitola to overcome present shortages in domestic and industrial water, and ensure adequate supplies until beyond the year 2000; and minor economies in thermal power generation through supplies of cooling system make-up water from project facilities. 74. Risks which have to be considered relate to construction timing, financing, and instituticonal setting. The construction timing risk is largely contained by an accelerated pace of tasks which are preliminary to construc- tion work, and by advance contracting of critical components which must be com- pleted in 1978 to ensure a four year construction period. The financing risk consists of cost overruns which could occur if the four year construction schedule is not met, but the cost overrun guarantee from SBS and the special efforts of the republican authorities to obtain all necessary funds represent adequate assurances that funds would most likely be provided without undue delays. The institutional risk is that associated with the prevailing system of land use rationalization in the project area. At appraisal it appeared that land use rationalization (see paragraph 66) was the best alternative, in the sense of optimizing production within the local preference for voluntary behavior as a means of organizing for water use. Nevertheless, there remains the risk that the prevaiLing system will not be sufficient to obtain the efficient organization of water use on the individual sector, with the result that the expected producition and income gains would be reduced or that more cumbersome and time consuming boundary readjustment measures would be imposed that could delay project operation and the resultant effects of such develop- ments have been taken into account in the sensitivity analysis of the economic rate of return discussed in paragraph 75 below. It is the judgement of the Macedonian Government and ours that, given the past history of the success of voluntary and cooperative efforts, this is an acceptable and prudent risk. - 26 - Economic Rate of Return 75. The overall economic rate of return is estimated at 15 percent. Return calculations incorporate the economic value of agricultural produce at the farmgate and the economic value of water sold to the generating plant and the municipal water authority under self management agreements negotiated by the parties concerned. This return does not reflect the additional net benefits expected from development of the processing industry in the project area. The economic rate of return is not greatly sensitive to moderate changes in component cost and benefit flows. An increase in costs of 10 per- cent accompanied by 10 percent decrease in revenues would lower the return to 13 percent, while the omission of economic revenue from the sale of bulk water would depress the return to 11 percent. PART VI - LEGAL INSTRUMENTS AND AUTHORITY 76. The draft Loan Agreement between the Bank and Stopanska Banka- Zdruzena Banka-Skopje; the draft Project Agreement between the Bank, Vodostopanstvo Pretprijatie za Stopanisuvanje so Vodi Skopje-Oozt Pelagonija- Bitola, and the Commune of Bitola; the draft Agreement between the Socialist Republic of Macedonia and the Bank; the draft Guarantee Agreement between the Socialist Federal Republic of Yugoslavia and the Bank; and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 77. Provisions of the agreement of special interest were noted in para- graphs 54 through 66 of this report and are listed in Section III of Annex III. Special conditions of effectiveness for the proposed loan (Loan Agreement, Section 7.01) are: (i) the execution of the Project Agreements on behalf of Vodostopanstvo, the Commune of Bitola and the Republic of Macedonia, and the execution of the Subsidiary Loan Agree- ment on behalf of SBS and Vodostopanstvo have been duly authorized or ratified (Sections 7.01(b) and (c) of the Loan Agreement and referred to in paragraphs 54, 55 and 60 of this report); (ii) the project unit, BOAL Strezevo, within Vodostopanstvo has been established under arrangements satisfactory to the Bank with a qualified and experienced director, and a qualified and expe- rienced financial director for Vodostopanstvo has been appointed (Sections 7.01(d) and (e) of the Loan Agreement and referred to in paragraph 54 of this report); (iii) all financing arrangements including cost overrun guarantees, and water users agreements have been duly authorized or ratified (Sections 7.01(a), (f) and (h) of the Loan Agreement and referred to in paragraphs 61 and 63 of this report); and - 27 - (iv) Vodostopanstvo has appointed the members of the independent advisory board on dam construction, under terms and conditions satisfactory to the Bank (Sections 7.01(g) of the Loan Agree- ment and referred to in paragraph 56 of this report). PART VI - RECOMMENDATION 78. I recommend th,at the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments July 26, 1978 Washington, D.C. TABLE 3A ANNEX I YUGOSLAVIA - SOCIAL INDICATORS DATA SHEET Page 1 of 4 pages LAND AREA (THOU KM2) -------------------------------a----e---------- --------------- YUGOSLAVIA REFERENCE COUNTRIES (1970) TOTAL 255.8 MOST RECENT AGRIC. 144.2 1960 1970 ESTIMATE RoMANIA SPAIN GERMANY FED.REP. OF*** GNP PER CAPITA (USS) 3BO.0 * 830.0* 1680.0 */a 550.0 /a 1580.0* 4420.0* POPULATION AND VITAL STATISTICS POPULATION (MID-YR, MILLION) 18.4 20.4 21.5 /a 20.3 33.6 61.6 POPULATICN DENSITY PER SQUARE KM. 72.0 80.0 84.0 /a 85.0 67.0 240.0 PER SQ. KM. AGRICULTURAL LAND 124.0 139.0 149.0 7a 136.0 105.0 439.0 VITAL STATISTICS CRUDE BIRTH RATE (/THOU, AV) 26.8 21.0 18.2 19.0 21.0 17.3 CRUDE DEATH F.,TE (/THOU,AV) 11.5 9.1 9.2 8.9 8.8 11.6 INFANT MORTALITY RATE (/THOU) 88.0 55.5 40.5 49.4 27.9 23.6 LIFE EXPECTANCY AT BIRTH (YAS) 63.7 67.7 68.0 67.7 70.s 70.3 GROSS REPRODUCTION RATE 1.4 1.3 1.3 1.3 1.4 1.2 POPULPTION GROWTH RATE (%) TOTAL 1.2 1.0 0.9 1.0 1.1 1.0 URBAN 6.0 4.6 .. 3.4 2.0 4.1 URBAN POPULATION (% OF TOTAL) 27.2 38.7 39.0 /b 40.8 S9.1 82.4 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 30.7 28.3 26.3 25.9 27.8 23.2 15 TO 64 YEARS 63.2 64.3 65.4 65.5 62.5 63.6 65 YEARS AND OVER 6.1 7.4 8.3 8.6 9.7 13.2 AGE DEPENDENCY RATIO 0.6 0.6 0.5 0.5 0.6 0.6 ECONOMIC DEPENDENCY RATIO 1.0 . 0.8 /c 0.7 /b 1.1 0.9 FAMILY PLANNING ACCEPTORS (CUMULATIVE, THOU) .. .. .. .. . USERA (% OF MARRIED WOMEN) .. .. .. .. EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 8300.0 ,, 9150.0d 9900.0 11900.0 26500.0 LABOR FORCE IN AGRICULTURE (%) 57.0 *- 39 . 49.0 25.0 8.9 UNEMPLOYED (% OF LABOR FORCE) 7.0 * 5 .. 1.1 /a 0.7 INCOME DISTRIBUTION % OF PRIVATE INCOME RECOD BY- HIGHEST sx OF HOUSEhOLDS 16.4 /a 15.1 . .. HIGHEST 20% OF HOUSEHOLDS 41.5 41.4 .. LOWEST 20% OF HOUSEHOLDS 6.9 'j 6.6 .. .. LOWEST 40X OF HOUSEHOLDS 19.0 18.4 .. DISTRIBUTION OF LAND OWNERSHIP X OWNED BY TOP 10% OF OWNERS (I) 1S.1** 15.1** 15.1* . . X OWNED BY SMALLEST 10% OWNERS(II) B4.9** 84.9** 84.9** .*. HEALTH AND NUTRITION POPULATION PER PHYSICIAN 140Q.0 /blOlQ.0 850.0 680.0 740.0 lb 580.0 POPULATION PER NUR.ING PERSON 1350.Q /b 410.0 450.0 200.0 * 350.0 POPULATION PER HOSPITAL BED 200.3 170.0 170.0 140.0 /c 220.0 90.0 PER CAPITA SUPPLY OF - CALORIES (X OF REQUIREMENTS) 115.0 124.0 137.0 118.0 107.0 121.0 PROTEIN (GRAMS PER DAY) 91.0 92.0 97.5 92.0 81.0 88.0 -OF WHICH ANIMAL AND PULSE 27.0 29.0 35.4 28.0 40.0 56.0 DEATH RATE (/THOU) AGES 1-4 4.5 2.6 1.7 2.4 0.9 0.9 EDUCATION ADJUSTED ENROLLMENT RATIO PRIMARY SCHOOL 96.0 94.0 96.0 Li 113.0 123.0 129.0/a SECONDARY SCHOOL 34.0 45.0 49.0 44.0 57.0 66.o7i YEARS OF SCHOOLING PROVlDED (FIRST AND SECOND LEVEL) 12.0 12.0 12.0 12-13 11.0 15.0 VOCATIONAL ENROLLMENT (X OF SECONDARY) 72.0 72.0 74.0 58.0 20.0 48.0/a ADULT LITERACY RATE (x) 77.0 85.0 . . 94.0 99.0 HOUSING PERSONS PE. ROOM (URBAN) 1.7 .. 1.3/b 1.3 /d *07/b OCCUPIED DWELLINGS WITHOUT PIPED WATER (%) ,. .. 61.5 M 88.0 ,e 0.3/c ACCESS TO ELECTRICITY (X OF ALL DWELLINGS) 54.5 .. 89.2/a 49.0 /d 100.0 RURAL DWELLINGS CONNECTED TO ELECTRICITY (%) 36.1 ,, ao.i/b 27.0 /d . CONSUMPT ION _ _ _ _ _ _ RADIO RECEIVERS (PER THOU POP) 85.0 163.0 193.0 152.0 214.0 318.0 PASSENGER CARS (PER THOU Pop) 3.0 35.0 72.0 .. 71.0 220.0 ELECTRICITY (KWH/YR PER CAP) 480.0 1288.0 1887.0 1615.0 1634.0 4128.0 NEWSPRINT (KG/YR PER CAP) 2.3 4.3 31 8 26 5.8 17.7 ------ --------- --------- ---------------- --------- --- SEE NOTES AND DEFINlTIONs ON REVERSE ANNEX I Page 2 of 4 paes- NOTES Unless otherwise noted, date for 1960 refer to any year between 1959 and 1961, for 1970 between 1968 and 1970, and for Most Rfeent Estimate between 1973 sod 1975. * Gh? per capita data are bseed or the World Bank Atlas methodology (1974-76 beit). o I. Agri-ultere land held by social sector (Kobinete). *e II. Agricultore aInd held by prifete small-holdor- "IC heotaren naniisc' AA Selection of Federal Republil of Germnay as an objectins coantry is based on the close econ-nic tie- maintained by the .o coantrfee as cell us an the fact that the grester part of Yugoalania' stoond one million corkers tnepor-rily abroad hoae raced employnenr in the Federal Republic of Germany. YXGOSLAVIA 1960 a. 1963; /b 1962. MOST RECENT ESTIMATE: 1976; /b 1971;c/c RatIo of popm neto i uner 1Si and 65 rod over to total lohor force; Ad Inclding shoot 900 chosand migrant.. uk-ro corking otd; Ac19~,7 oncoto~ of -ctve resident labor force If lg-4 ovnra8r jj 1972; 'T Inside ont1 ROMANIA 19A0 to Not c mparablo to thoe fo other Centrolly Planned Eoenonin. DerI-ed by usifg tho Bank -,laserhodolofy, by ad4eting official R-enian n-titon- occoo-n-sca and conoecting the ito ft doilare at the effectine e_chango rare for foreign trade tednessttone ohlch eppronta-tnt Lei 20 per US dollar; /b Ratio of popelation under 15 and 69 and oner to total iabor forcel /c Hopi.ala oly, eicludee -enitarit and mesoroity hones; /d 1966; /e Inside nly. SPAiN 1970 /s Employment office estimace; /b er4nter-d. net alt p-rticing in the cent,y. GERMNY FED. RP. (OF 1970 /s Incolde tho r-1e-ant data relatiog to B-rlin for which -p-arate date h-vn -ot been npplied; /h rteol. urban rurl; /c In-ide oniy. R16, March 2. 1978 DEFL.FITIrIS OF SOCIAL INDICATOTS Total - Toal surfce ares cesprisi.g lsd sres and island eaters.m seacana gda nurp ses trained or -certIfied nursee and M eons recent es-timate a agriceltersI area used temp-rsrily nr per.a- sinlitary peesoonel with tra.nIn. or enpe--ence meetly for crops, pastures, earket 6 kitchen ga-dens or to lie fellow. Psulation per hospitl1 bed - Popuiat-io divided by cumber of hospital beds ansilabie in public and priests general and specialized hospirel and GNP er caEpita (US) - GNP per capira e ..imanes ar current macekr prices, rehabtilitaioncenneras; ecnde nursing ho d es-bii7 . f lculosed by same conseeta o method as gWrld ne-k Atlss (1973-75 basie!; custodisl and preventive oars 1960; 1970 sed 1975 data. Peraitaae of foruliee av of reirsePnts) - Onepuerd free energy eguin-le-t of met fond espp.lies non IableI.n coutry per capita pee day; Populanion and ovsta stacisoic ansilshle sopplles r.espetae cmnesric producotln. beporon lean enyorra and Populanion (id-vear million) Ae of July firsc if not available, aerage changes In stock; n-t sepplies exclude anImal feed seeds, quantites used ef two end-year estimates ; 16, 1970 and 1971 data. In food processing aed losses in distributios; regqiremente ere eat_aated by FAO based on physiologi-al needs fnr n..sIl actioity and health canal.- Potulation denktry - per sq uare ks -Mld-ce-r populaiton per square kilpeter s-tig e_ -irosssetsl tenper..ur_, body weights, age ncd see diatrin-...us to (100 hentar_es nf totel erea population, and allealeg 107l fee eas-es t hnsnehold lare. Ppulation deceitvn-ar gears Im of serGe land - Competed as sbone for Per caeita surely o erotei: ferns. tee dad) - Prot-in cntenet of per .apita agrinult_cal lend only. net sopply of food pe day; net supply of fond is dfied aa be; qi- nests for all countriea established by tSDA Economic Resear-h Serelcen Vital esatistics pro_.dn foe a tininu allneasce cf 60 gr9as uI total prote per day, asd Crude birob rete oar ohonsand. aoerae - h dn- 1 line birthn pe thssaned of 20 orEs of animnl and pulse protei, of which 10 grs shold be animal nId-yssr population; tseyesrt ithl etl verages ending in 1960 and 1970, protein; these dtandardd are low.er cha those of 75 grA of total preteEn ard fi_e-yaar average aeding in 1975 fee enst_recent istimte. nnd 23 gr_en of anIma.l proteLe as sanerage for the -,rld, penponed by FAO Crudds death nets er tbnusand. average unsal deaths per thosan i o mid-yner in che rhird World rood Survey population; ten-year .ritbtaic aerage ending in 1960 and 19710 and fine- Per capita protein seenle free sienl and eulse - Protein supply of food year ae- rfge ending in 1975 fee enst orsent astimate derived free aelmels and pelese tn grms Wpr day Infant mortdlity rate f/thont - Anemsl dearh. of infants under one year of age Deeth rata (/thoh) snes 1-4 - Annual deaths pr .o.ussnd tD age genup 1-4 per rh..sad line birth. yearn, ro child-en in this tse geolp; suggesred as en ed icator of Life a...ot_at birh_fy - Average number of years of life remaiiningt en_alnuirititn birth; eusully fite-year oavrsgea endieg in 1960, 1970 and 1975 fur develnp- ing cnnntrlee. Edusatimn Green reeroduction rate- -verage -nebe- of lIIe deughtrera w oman will beer Adletued enrollie-t urtin - primary school - ecrolLmet of all agee as pe- In her n-t- reproductive perind if she enpariene Pras..st ege-pe-ificcsueo rmr schno-g popual; inldn ildreagd6-1yer fertILity rtae; nualLy fi-year oeagee ending in 1960, 1970 and 1975 her edoftnd foe dff-ste Lengths of prlmty educ-ti; foe countri eith for deneloping cInet-iee unienrsal educeoion, enrolent may senced 1QQ7, aic ames peplls are beln= Poenlation graath raRe i7.l - total - CsiAponed snsel growth teens of mid-year or sbhe ths official school age. population for 1950-60 1960-70 and 1970-75. Adlu.ted ser-l- ientrat -seconda school - Geepoo-d as tuns: asondarr Poeplation snoath eats (i.) - srban - Competed likb growth rata of total educatin requiree at less r font years of approved primary inatructin; pnpnlarinn; differset definitions of urban areas may aftect ctmp-rability of provides general, nocetional nr t-acher training in-tenctios- for pepile dana among cousntriesa of 12 to 17 yearn of age; correspondence courses see generalSy exluded. Urbeneoletlom (7. ot terall - Ratio at urban en total population; different Years nf echooling eronided (firs teed second lenlels - Totel yaec. of definitians of urban ar-aa mAy effect -Cep-rability of data among conenriesa roto7ing; at ceo.edary leel, conationel instruction n y be paetially or nomplately encloded. Age tructure (percent) - Children (0-14 years), *onking-age (15-64 years), Lneational esrolLeos IY of secondary) - Vo-ational lestlonolona iocluds and riecrd (65 nears and one) da percenteges of mid-veer population. nechnical. industoal or ocher progrees whfth operace Indepsedeet cor es Aoe dependency ratio - fari at population coder 15 and 65 -nd ove tohose depertmentn of secondary instttut_oIs. of ages 15 th-ough 64. Adulc lIteracy rate (Y) - Literate nd,ls (ble to read and eon el as per- Economic depandencv rotio - Ratio of population -ndre lb and 65 -nd oner to ceotegs of cutol ade1r population aged 15 years and ore. the Iaboe force in age group of 1S-64 yearn fanily~~~~~~~~ _lnlneceot _cmlas than - ceimelatton somber of accept ore Housing of birth-conreol devices under aspnices of national fastly plonelog eroertm Pereons pr roos (lrb.n' - Aceage v ng ber of persons per ro-m is occupied sInce Incepton- co-nentional d-eIling it -rban scene; d-ellrigs e-clode non-penranrot fastll planniong-ousera IT(e/.f serled nemeof - Percfnceges or carried ocen of eructures and unoncupied pats. chHld-bse-inc age (15-44 years) w_o ue bieth-coete_l device_ to nIl carried Occu1ed d-ellinee virbout , lped water CT - Occupied coneertonal dIel,ltge aem in none age g-oup. ie urbn and ruraL *reaeseithoo Inside or outside piped aster fa-ilitoes anpreog f all oncpied dwellings. employmen- -ccencooelncoetcioy IT of aII d-eli . C t dweIlings itho ocai labor furce Etooendl -Econenically acc-ce persons Including anned elec-rItuty in l1ving q-aroers an percel,oof total dwellIngs Inorban and forces sod unemployed boo excluding hoesewis, strudents, etct : defintioi ns rural areas 5n earlucs countries see nor comparable. core; dwelltnge connected to electe 1dm (E) Computed as .scoe for rural Labor force ic agriculoure (7.) - Agelculrtuel lab-or fore (to fertolg, forssten, dellgos ouly. henning and ftchinn) ps -eroenoags of cotal Labor foIr_ tnIrptoyed (% of labar force) . TIemployrd are usually defined na persons who l?oet,upoion are able and oilliEg to labk a Lnb, cut of a lab -o a gi-en day, remained out RadSo recelvees loer tob roe) - 511 typee of receIvers for radio bro.dca.c. of F lob, end seeking work fore spectifled Inohnm perIod not erceeding one co ceecral pablic pee coboaaed of Ppplar)nn; socludee eelicensed receivers nek; may. 000 be comedeshble bitweec coenietee due to dlffereoc definions in canoutrle and in y.re shen h enIatra ton of radio secsaaa to effaet of ufmeployrd and soerce of dar - e.g., eployment office noatisolce, sample data foe recent yeers may sot be ceapareble stecs nest c ountelee ahotlbed eurceys, compulsory un-oploy-eno t-sure-ce liceesif. Income diatribution- Prcencage of peivate inc me (botb In cash and kind) less than rIght presoec; sclude shguL ancen, hearses end ectaryt received ly richest 50. richest 20f, pooreso 207, and po--Cet 40 af htones- vehiclel holds electricitv (koh/ve Pne car) - IAnal conasoptipp of ienduteial caooertel, public and peitvats esec tenty eD kilonato h-nrT per capita, geera lly Olettbetlon of land p=peerhip -Perce-itge- of land moed by wealthiest 137 based me prodrti-on data, aithout allonance for lomess In grids bar allpv- aed poorest 107 of land wneres ing foe 5peorts and -epoeca af elecricity. Nleaaiu I',.ke/pr dper ae) - 'errs pit an..u. I nosopolofmI kin llog- Heaoth and Nutrition testimtd f(Ro dometic p od iction plct n t import sf n v-prLnt Popelatis per physician - Population divided bv n-umer of practiciDg physicians qualifIed from a medical school nr I-ntoeetio levaL ANNEX I Page 3 of 4 ECONOMIC DBVELOPMENT DATA (Amoants in Million US Dollars) Actual Preliminarv Estimated 1972 1973 1974 1975 1976 1965-72 1972-75 1973-76 1972 1974 1976 NATIONAL ACCOUNTS CoeAstant 1974 Prices and Exchange Rate of $1 - 17.0 Din. Average Annual Growth Rates As Perceot of fEY Gross Domestic Product 21,638 22,720 24,765 25,887 26,922 5.6 6,2 5.8 97.8 100 99.3 Gains Icom Toe-s of Trade 468 681 - +142 +197 2.2 - 0.7 Crone Domestic Income 22,106 23,401 24,765 26,029 27,119 5.5 5.6 5.0 100.0 100 100.0 Imports (ifel. NFS) 6,588 7,600 8,312 8,350 8,082 12.6 8.2 2.1 29.7 33.6 29.8 Exports (i-l. SFS1 5.437 5.788 5,694 5.872 6.506 8.3 2.6 4.0 24.5 23.C 24.0 R--esre Gap 1,151 1,812 2,618 2,478 1,576 C-nsumptian Expenditure 16,139 17,716 19,953 19,795 19,670 6.7 7.0 3.5 73.0 80.6 72.5 Ievest-ten Expenditure 6,650 6,816 7,429 8,370 8,827 6.0 8.8 9.0 30.1 30.0 32.5 Nati-oal Savings 6,904 6,806 6,241 7,330 8,717 6.6 2.0 8.6 31.2 25.2 32.1 Domestia Savings 5,499 5,006 4,812 6,092 7,252 3.1 3.5 13.2 24.9 19.4 26.7 MERCHANDTSE TRADE Annual Data at Current Prices Imports Capital Goads 689 1,004 1,305 1,887 1,758 21.3 17.4 23.9 Petrolesm and Faels 177 359 952 943 1,080 5.5 12.6 14.6 1,termediate Goads 1,859 2,450 4,291 4,109 3,618 C-osumption Goods 502 698 972 758 911 15.5 12.9 12.4 Total Merch. Imports (c.i.f.) 3,227 4,511 7,520 7,697 7,367 10.0 12.9 12.4 Exportb Capital Goods 316 389 514 695 920 14.1 13.5 1.8 Textile and Leather Goods 362 409 477 600 761 16.2 12.5 15.6 Non-ferrous Metallurgy 272 325 556 458 472 12.2 14.6 9.7 Agricultua.l Products (i-. food) 400 475 439 488 640 17.9 11.5 13.1 other 887 1255 1,819 1.831 2,08539.6 47.9 42. Total Metah. Experts (f,o.b.) 2,237 2,853 3,805 4,072 4,878 39.6 47.9 42.8 MERCHANDISE TRADE INDICES 1974 = 100 109 114 Export Pfe- Indas 65 76 100 l0911 Impart Price Index 58 60 100 105 109 Toe-s of Trade Index lO9 112 100 104 105 Export Volume Iden 93 95 100 98 112 VALUE ADDED BY SECTOR Annual Data ir Constant 1974 Prices and Exchange Rate of $1 = 17.0 Din. As a Percentage of Total Agriculture 3,213 3,490 3,763 3,663 3,846 2.7 4.5 3.2 15.6 16.0 15.0 Mamufacturing and Mining 6,374 6,712 7,471 7,888 8,125 6.6 7.4 6.6 31.0 31,8 31.8 Other 10.956 11,362 12,276 13,026 13,589 5.4 5.9 6.2 53.3 52.2 53.2 Total 20,543 21,570 23,510 24,577 25,560 5.3 6.2 6.2 100.0 100.0 100.0 PUBLIC FINANCE-1L Current Peises As Percent of GDP/Market Price Current Receipts 2,772 3,48S 4,841 6,305 ,, .. .. .. 17.5 19.5 Current Expeoditures 2,520 3,154 4,794 6,267 ,, .. .. .. 16.0 19.4 Budgetary Savings 252 335 47 38 L. - '' 1.6 0.2 Public Soater Itovesxnta 224 281 328 352 ,, ,, .. .. 1.4 1.3 LABOR FORCE AND OUITUT PER WORKERY TOTAL LABOR FORCE VALISE ADDED PER WORKER (1974 PRICES AND EXCHANGE RATE $1 17 Di. Million 7. of Total 1972-75 US Dollars Percent of Average 1972-75 1972 1975 1972 1975 Av. Ann. Growth Rate 1972 1975 1972 1975 Av. Ann- Growth Rate Agriculture Y 3.55 3.1C 45.4 39,0 -4.6 905 1,182 34 38 9,3 1Ssxsfacturl-g and Mixing 1.65 1.82 21.2 23.6 4.3 3,863 4,218 147 136 3.0 Other 2/ 2.60 2.95 33.4 37,4 4.3 4,214 4.416 160 142 1.6 Total - 7.80 7.92 100.0 100.0 0.8 2,634 3,103 100 1000 1/ Budgets of Federation, Republics and Autonomous Prov:ln-es, and Co-.unes unconsolidated. 2/ Total resident Active labor force, i.e. excluding workers abroad sad unemployed. 3/ Estinated active labor force in the private and snital agricultural sector. Europe, Middle East and Mach Afria Region Janua.ry 27, 4978 ANNEX I Page 4 of 4 BALANCE OF PAYMENTS AND EXTERNAL ASSISTANCE AND DEBT Annual Actual Estimated Growth Rates 1972 1973 1974 1975 1976 1977 1972-76 SUMMARY OF BALANCE OF PAYMENTS Exports (incl. NFS) 3424 4363 5696 6307 7259 7985 20.0 Imports (incl. NFS) 3828 5124 8337 8760 8664 10832 22.5 Resource Balance (X-M) -404 761 -2641 -2453 -1405 -2847 Interest -165 -222 -285 -337 -350 - 428 20.2 Workers Remittances 889 1301 1511 1575 1728 1750 18.1 Other factor services net 17 50 93 62 40 42 23.8 Current Transfers (net) 82 96 138 121 137 150 13.6 Balance on Current Account 419 464 -1184 2 150 - 1333 M< Loans L1 Disbursements 943 1170 1426 1850 1700 2424 15.9 Repayments -570 -686 -814 -930 -800 - 1091 8.8 Net Disbursements 373 484 612 920 900 1333 24.5 Capital Transactions n.e.i./2 -117 -255 139 -68 -133 - Use of Reserves -675 -663 438 180 -917 _ Actual GRANT AND LOAN COMMITMENTS DEBT AND DEBT SERVICE4- 1973 19 74 19 75 19 76 Official Grants & Grant-like - - - - Public Debt Out. & 1871.8 2088.3 2325.3 2765.8 Disbursed Public M< Loans IBRD 75.0 104.9 256.5 209.0 Interest on Public Debt 98.4 105.3 127.9 143.0 IDA - - - - Repayments on Public Debt 208.7 288.1 316.9 159.7 Other Multilateral - - - - Total Public Debt Service 307.1 393.4 444.8 302.7 Governments 183.9 179.7 615.4 274.7 Other Debt Service 746.4 822.7 989.7 1134.8 Suppliers 82.3 3.0 .6 - Total Debt Service 1053.5 1216.1 1434.5 1437.5 Financial Institutions 121.4 - 73.1 86.2 Bonds - - 51.5 - Burden on Export Earnings (%)/- Public Loans n.e.i. 4.2 - - - Total Public M< Loans 466.8 287.6 997.2 569.9 Public Debt Services Ratio 5.3 5.4 5.5 3.3 Total Debt Service Ratio 18.3 16.6 17.7 15.8 TDS - Direct Investment IncL - - - - Actual Debt Outstanding on Dec. 31, 1976 EXTERNAL DEBT Disbursements only Percent Average Terms of Public Debt World Bank 655.1 23.7 IDA - - Int. as % Prior Year 6.1 5.6 6.1 6.1 Other Multilateral 4.5 0.2 DO&D Governments 1516.2 54.8 Amort. as % Prior Year 12.9 15.4 15.2 6.9 Suppliers 50.8 1.8 DO&D Financial Institutions 521.6 18.9 Bonds 17.5 0.6 IBRD Debt Outs. & Disbursed Public Debt n.e.i. - - " as % Public Debt O&D 18.8 20.3 24.0 23.7 2765.7 100.0 " as % Public Debt Services 12.5 11.3 12.6 22.5 Other M< Debts/3 4379.8 Short-term Debt (disb. only) - 1/ Includes direct foreign investment. 2/ Includes errors and omissions, short term loans, net export credits, IMF account, National Bank and Commercial Bank Credits. 3/ Estimate. 4/ Figures on debt service do not correspond with balance of payments figures due to differences in coverage. 5/ Includes workers remittances. Europe, Middle East and North Africa July 26, 1978 ANNEX II Page 1 of 9 pages THE STATUS OF BANK GROUP OPERATIONS IN YUGOSLAVIA A. STATEMENT OF BANK LOANS (as at May 31, 1978) US$ million Amount (less cancellations) Number Year Borrower(s) Purpose Bank Undisbursed Twenty-one Loans fully disbursed 567.7 777 1971 SFRY Multipurpose Water 45.0 15.5 782 1971 "Babin Kuk" Hotelsko Turisticki Centar, Dubrovnik Tourism 20.0 0.7 836 1972 Twelve Electric Power Enterprises in Yugoslavia Power 75.0 5.2 894 1973 Stopanska Banka, Skopje Agricultural Industries 31.0 4.2 916 1973 Naftagas Gas Pipeline 59.4 21.4 990 1974 Bosnia-Herzegovina Road Funds Roads 30.0 0.4 1012 1974 Stopanska Banka, Skopje Industrial Credit 28.0 2.9 1013 1974 Privredna Banka Sarajevo Industrial Credit 22.0 3.0 1026 1974 Community of Yugoslav Railways Railways 93.0 35.8 1060 1974 Port of Bar Harbor Expansion 44.0 17.1 1066 1974 Vodovod Dubrovnik Water Supply and Wastewater 6.0 5.0 1129 1975 Vojvodjanska Banka Agricultural Credit 50.0 28.0 1143 1975 Republic Rtoad Organizations in Slovenia, Montenegro and Serbia Roads 40.0 16.2 1173 1975 Jugoslavenski Naftovod Pipeline 48.5 36.4 1262 1976 Republick-i Fond Voda Water Supply, Sewerage & Water Resources 20.0 16.8 1263 1976 Sarajevo W4ater Supply & Water Supply & Sewerage Enterprise Sewerage 45.0 40.6 1264 1976 Sarajevo Gas Enterprise Air Pollution & Naftagas Gas Unit Control 38.0 36.9 1277 1976 Privredna Banka Sarajevo, Stopanska Banka Skopje, Investiciona Banka Titograd, Kosovska Banka Second Industrial Pristina Credit 50.0 30.4 ANNEX II Page 2 of 9 pages US$ million Amount (less cancellations) Number Year Borrower(s) Purpose Bank Undisbursed 1360 1977 Management Organization Multipurpose Water 54.0 53.7 "Metohija" 1370 1977 Investiciona Banka, Agriculture Titograd Industries 26.0 25.2 1371 1977 Stopanska Banka, Skopje Agriculture Industries 24.0 23.7 1377 1977 Republic Road Organiza- tions in Bosnia- Herzegovina, Serbia, Macedonia, and Kosovo Roads 56.0 45.2 1469 1977 JUGEL and six Electric Power Organizations in Second Power each Republic Transmission 80.0 80.0 1477 1977 Vojvodjanska Banka Second Agricul- tural Credit 75.0 75.0 1534/a 1978 Community of Yugoslav Railways Railways 100.0 100.0 1535/a 1978 Republic Road Organiza- tions of Slovenia, Croatia and Serbia Roads 80.0 80.0 1561/a 1978 Elektroprivreda Bosne i Hercegovine Hydro Power 73.0 73.0 Total (less cancellation) 1,880.6/b 872.1 of which has been repaid 200.3 Total now outstanding 1,680.3 Amount sold 8.0 of which: Amount repaid 6.8 1.2 Total now held by Bank 1,679.1 Total undisbursed 872.1 /a Not yet effective. /b A loan of US$40.0 million to Kosovska Banka Pristina for a Third Indus- trial Credit Project and three loans of US$20.0 million each to Privredna Banka Sarajevo, Stopanska Banka Skopje, and Investiciona Banka Titograd for a Fourth Industrial Credit Project were approved subsequent to the above date of Statement A. ANNEX II Page 3 of 9 pages B. STATEMENT OF IFC INVESTMENTS (as at May 31, 1978) Type of Amount in US$ million Year Obligor Business Loan Equity Total 1970 International Investment Investment Corporation for Yugoslavia Corporation - 2.0 2.0 1970 Zavodi Crvena Zastava Fiat S.P.A. Automotive Industry 5.0 8.0 13.0 1971 Tovarna Automobilov in Motorjev Automotive Maribor (TAM)/Klockner-Humboldt Industry 7.5 2.7 10.2 Deutz A.G. (KHD) 1972 FAP-FAMOS Belgrade/Daimler Automotive Benz A.G. Industry 13.4 3.4 16.9 1972/78 Sava/Semperit Tires 4.0 1.5 5.5 1973 Belisce/Bel Pulp and Paper 13.3 - 13.3 1974 Zelezarna Jesenice/ARMCO Special Steel 10.0 - 10.0 1974 Salonit Anhovo Cement Plant 10.0 - 10.0 1975 Rudarsko Metalurski Steel 50.0 - 50.0 1977 Frikom ro Industrija Smrznute Food and Food Hrane Processing 4.0 2.3 6.3 1977 Tvornica Kartona i Ambalaze Cazin Pulp and Paper Products 15.4 2.5 17.9 Total Gross Commitments 132.6 22.4 155.0 less cancellations, terminations, exchange adjustment, repayment and sales 72.2 2.6 74.8 Total commitments held by IFC 60.4 19.8 80.2 Total Undisbursed 14.3 7.9 22.2 ANNEX II Page 4 of 9 pages C. PROJECTS IN EXECUTION I/ Loan 777 Ibar Multipurpose Water: US$45.0 million Loan of June 30, 1971; Effective Date: May 31, 1972; Closing Date: December 31, 1978. The start of project work was delayed for one year. Construction is now underway, the main dam is completed and the reservoir is now being filled. A small part of the irrigation network has been completed with the remainder expected to be completed by 1979. Project costs have been above appraisal estimates, but the overrun financing is being provided by the Province of Kosovo and from Federal sources. Delays have been encountered in the arrangements for boundary adjustment. Consultants have been engaged to help find solutions, and the Kosovo Government has enacted appropriate legislation. After a delay of about five years, a draft law has been prepared by the Kosovo Government and is expected to be enacted in the near future, which will assist in the provision of agricultural extension services to the private sector. Loan 782 Babin Kuk Tourism: US$20.0 million Loan of July 21, 1971; Effective Date: June 12, 1972; Closing Date: December 29, 1978. There were initial delays in the implementation of the project due to lateness in making the loan effective and in mobilizing consultants. Bids for civil works and estimates for other components indicated that the project would cost at least twice as much as originally estimated (US$49.9 million), largely due to rapid inflation in construction costs. The Bank and the proj- ect sponsors agreed to finance a reduced complex containing some 2,034 beds (Amendment to Loan 782-YU, December 16, 1974, R74-259) at a total cost of US$51.5 million, requiring additional financing of about US$1.6 million and a change in sponsorship which has been approved by the Bank (Amendment to Loan 782-YU, October 4, 1976, R76-237). The hotels were inaugurated and opened for occupancy in June 1976. Occupancy rate for 1977 was below expecta- tions notwithstanding 100 percent occupancy during high season. This gave rise to financial liquidity problems which were overcome with the assistance of the sponsoring Yugoslav banks. Advance bookings for 1978 represent a considerable improvement over the corresponding 1977 period. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the under- standing that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. ANNEX II Page 5 of 9 pages Loan 836 Power Transmission: US$75.0 million Loan of June 23, 1972; Effective Date: December 29, 1972; Closing Date: December 31, 1978. The Project construction has progressed slowly and is expected to be completed by mid-1978, about one and one-half years late. Its cost has increased to about $415 million (up 84 percent) chiefly due to escalation in prices. The resulting cost overrun is being financed from funds received from the Federal Republic of Germany, local loans and from the Borrowers' own internal sources. Appointment of management consultants was delayed until mid-1976, but their recommendations have now been made and are being discussed with JUGEL and the Borrowers with the objective of beginning implementation of the recommendations by mid-1978. The promulgation of the new Constitution in 1974 and the consequent evolution of the legal and financial status of the Borrowers, particularly in regard to the requirement of their policy of pool- ing resources at the Republican levels required changes in the legal arrange- ments including the application of financial covenants. These changes were incorporated in the Second Power Transmission Project. Loan 894 Agricultural Industries (Macedonia): US$31.0 million Loan of May 25, 1973; Effective Date: November 28, 1973; Closing Date: December 31, 1978. All loan funds provided under the project have been committed by subloan agreements through Stopanska Banka. Out of 43 subprojects financed under the project, 36 are completed, seven are under construction. Progress on the latter is satisfactory. Loan 916 Naftagas Pipeline: US$59.4 million Loan of June 25, 1973; Effective Date: March 22, 1974; Closing Date: December 31, 1979. The costs of equipment and civil works increased so that project costs were about 71 percent above the appraisal estimate. As a result of this and of a reallocation of priorities in the use of natural gas, the proj- ect has been redefined (Amendments to Loan 916-YU, May 13, 1976, R76-116). Phase I is a reduced version of the original plan. Phase II provides for a pipeline extension to link up with the pipeline to be constructed under the Sarajevo Air Pollution Control Project, for which additional Bank financing was obtained. Naftagas has obtained additional local currency financing required for Phases I and II. A delay of more than two and one-half years in project implementation has occurred as a result of the increased project costs and revision of the project. Construction started in late June 1976, and the project is scheduled for completion by end-1979. Loan 990 Sixth Highway: US$30.0 million Loan of May 31, 1974; Effective Date: December 10, :[974; Closing Date: December 31, 1978. All road secitions are open to traffic. Two requests for changes in road alignments have been agreed in order to provide better service to two communities. Procurem,ent of engineering and laboratory equipment has been contracted and payments are now being finalized. An EDI type training course is also being arranged in Yugoslavia in October 1978. ANNEX II Page 6 of 9 pages Loan 1012 Macedonia/Kosovo Industrial Credit: US$28.0 million Loan of June 21, 1974; Effective Date: December 19, 1974; Closing Date: December 31, 1978. Progress has been satisfactory. The loan is fully committed. Loan disbursements have been accelerating after a slow start and are expected to soon catch up and even surpass appraisal estimates. Loan 1013 Bosnia-Herzegovina/Montenegro Industrial Credit: US$22.0 million Loan of June 21, 1974; Effective Date: December 19, 1974; Closing Date: December 31, 1978. The note under Loan 1012 above applies also to this loan. Loan 1026 Fourth Railway: US$93.0 million Loan of July 10, 1974; Effective Date: February 12, 1975; Closing Date: June 30, 1979. The project consists of the 1974-76 slice of the Railways' 1973-77 Investment Plan. Government efforts to combat inflation caused railway tariffs to lag behind inflation and gave rise to financial and administrative diffi- culties which, in turn caused substantial delays in project implementation. With tariff increases approved both in early 1977 and 1978 these problems have largely been resolved. Meanwhile, institutional developments, including improved investment planning and management, the formation of COIs and the signing of Social Agreements on railway and transport policies have been most encouraging. Loan 1060 Port of Bar: US$44.0 million Loan of December 11, 1974; Effective Date: June 13, 1975; Closing Date: June 30, 1980. In general the Project is progressing well. Except for railway facilities outside the port area and the grain silos, the project is expected to be completed by mid-1978, about six months behind schedule. The railway facilities and grain silos are scheduled for completion by end-1978 and end-1979, respectively. Loan 1066 Dubrovnik Water Supply and Wastewater: US$6.0 million Loan of December 24, 1974; Effective Date: June 26, 1975; Closing Date: December 31, 1978. Delays in preparation of final designs and tender documents have put construction about a year behind schedule. Services to the Bank financed Babin Kuk Hotel Complex (Loan 782-YU) were, however, completed in time for its initial operation and the remaining water supply component is nearing com- pletion. Construction is progressing satisfactorily on the sewerage component. ANNEX II Page 7 of 9 pages Loan 1129 Agricultural Credit: US$50.0 million Loan of June 20, 1975; Effec- tive Date: Eebruary 12, 1976; Closing Date: December 31, 1979. The Project Operations Unit of Vojvodjanska Banka, established in March 1976, is working satisfactorily. Project operations have shown encour- aging progress with respect to appraisal methodology and related aspects of institution building. Ninety percent of the loan has been committed. Dis- bursements are behind appraisal projections, given initial organizational and learning curve problems, delays in procurement, unfamiliarity of participa- ting banks with withdrawal applications, timetaking translations and the time lag between commitments and disbursements. However, disbursements have accelerated during the last year. Loan 1143 Seventh Highway: US$40.0 million Loan of July 18, 1975; Effective Date: March 30, 1976; Closing Date: June 30, 1979. With the award of the last two contracts in Montenegro, work is now in progress on all the project roads of Serbia, Slovenia and Montenegro. The Serbian road sections have been substantially completed and are open to traf- fic. Work in Slovenia is on schedule but progress in Montenegro is somewhat slow owing to contract delays. Nevertheless, all road works should be com- pleted by the loan closing date. Loan 1173 Naftovod Oil Pipeline: US$49.0 million Loan of November 19, 1975; Effective Date: July 28, 1976; Closing Date: December 31, 1979. Due to slower than anticipated progress of design and procurement it is estimated that a seven-month slippage in the completion of Phase I will occur, though it is expected that the balance of the Project will be completed on schedule. The revised cost estimates of the project indicate that there would be a cost overrun of about 27 percent because of required changes from original project components and increases in local costs. The Borrower is taking steps to obtain supplementary financing from various sources both foreign and local. The economic viability of the project remains sound. Upon review of the award of a site preparation contract, the Bank concluded that the contract was not awarded in accordance with the Bank's Guidelines for Procurement and the relevant portion ($470,000) that would have otherwise been eligible for disbursement was cancelled from the Loan. Loan 1262 Morava Regional Development Project - Water Supply, Sewerage and Water Resources: US$20.0 million Loan of June 14, 1976; Effective Date: November 3, 1976; Closing Date: December 31, 1980. The regional development study is finished and the report is being finalized. The flood control and water quality studies are underway after initial delays in selecting consultants. Construction of the Vrutci Dam has begun. ANNEX II Page 8 of 9 pages Construction is completed on the principal parts of the Cacak component, the remainder is well advanced. Construction is also underway in Titovo Uzice. Final designs of sewage treatment plants in Cacak are underway, and in Titovo Uzice, are dependent upon the recruitment of suitable foreign assistance to local consultants. The pilot irrigation components have been delayed pending the establishment of suitable monitoring arrangements. The creation of the Morava Region Water Community of Interest was delayed due to the longer than anticipated process of seeking agreement among all the Yugoslav parties concerned on the structure of the organization. Staffing has been strengthened in the water authorities in Cacak and Titovo Uzice and in the Morava Region Water Community of Interest. Loan 1263 Sarajevo Water Supply and Sewerage: US$45.0 million Loan of June 8, 1976; Effective Date: November 9, 1976; Closing Date: June 30, 1981. Major contracts for supply and installation of water pipes and sewers have been awarded and construction is underway. Prequalification of contractors for the sewage treatment plant was completed and design work is progressing satisfactorily. Loan 1264 Sarajevo Air Pollution Control: US$38.0 million Loan of June 8, 1976; Effective Date: May 31, 1977; Closing Date: June 30, 1981. Consultants for final designs and tender documents have been recruited and work on major tenders is underway. Contracts for supply and installation of gas distribution network and high-pressure loop-line have been awarded and mobilization is underway. Tendering for gas transmission line, Sarajevo-Zvornik, is underway. Loan 1277 Second Industrial Credit: US$50.0 million Loan of June 14, 1976; Effective Date: October 29, 1976; Closing Date: December 31, 1980. The portions of the loans to the Bosnian, Macedonian and Montenegrin banks have been progressing satisfactorily. The portion for the Kosovan bank, while being committed more slowly, is forecast to be fully committed by end-July 1978. Disbursements are slightly behind appraisal estimates. Loan 1360 Metohija Multipurpose Water: US$54.0 million Loan of February 3, 1977; Effective Date: July 27, 1977; Closing Date: December 31, 1982. Local consultants have been retained as project consultants and are proceeding with final designs on the project components and preparation of bidding documents. Two local construction contracts have been awarded and invitations for international tenders for the dam will be issued shortly. ANNEX II Page 9 of 9 pages Loan 1370 Montenegro Agriculture and Agro-Industries: US$26.0 million Loan of March 10, 1977; Effective Date: July 27, 1977; Closing Date: June 30, 1983. Institutional arrangements have been completed, and the implementa- tion of the project is proceeding on schedule. Tendering for ICB procurement for the winery and cold stores is in progress. Loan 1371 Macedonia Agriculture and Second Agro-Industries: US$24.0 million Loan of March 10, 1977; Effective Date: July 27, 1977; Closing Date: June 30, 1982. Sub-loans for four out of eleven agro-industrial sub-projects have been approved by the Borrower. Sub-projects in the individual sector are being processed. The hiring of procurement consultants is expected soon. Loan 1377 Eighth Highway: US$56.0 million Loan of April 13, 1977; Effective Date: September 7, 1977; Closing Date: March 31, 1981. All road contracts have been awarded and work is satisfactorily in progress. The contract for the Highway Master Plan for Kosovo has also been awarded. The studies on Rload User Charges and Rail Costs are in progress. Loan 1469 Second Power Transmission: US$80.0 million Loan of July 11, 1977; Effective Date: January 31, 1978; Closing Date: December 31, 1982. Procurement for most project components is underway. The proposed loan from the European Investment Bank was signed in November 1977 and local loan agreements have been executed. Loan 1477 Second Agricultural Credit: US$75.0 million Loan of July 29, 1977; Effective Date: January 30, 1978; Closing Date: June 30, 1981. All participating banks have identified the main investors and indicated that funds will be committed faster than under the first project. Loan 1534 Fifth Railway: US$100 million Loan of April 13, 1978; Effective Date: August 31, 1978; Closing Date: June 30, 1982. Terminal date for declaring effectiveness is August 31, 1978. Loan 1535 Ninth Highway: US$80 million Loan of April 13, 1978; Effective Date: July 31, 1978; Closing Date: December 31, 1981. Terminal date for declaring effectiveness is July 31, 1978. Loan 1561 Middle Neretva Hydro Power: US$73 million of May 31, 1978; Effective Date: September 29, 1978; Closing Date: June 30, 1982. Terminal date for declaring effectiveness is September 29, 1978. ANNEX III Page 1 of 2 YUGOSLAVIA MACEDONIA STREZEVO IRRIGATION PROJECT Supplementary Project Data Sheet Section I: Timetable of Key Events (a) Time taken by country to prepare project: Three years (intermittently from July 1972 to October 1977) (b) Agency which prepared project: Consultants, FAO/Bank Cooperative Program and Bank (c) Project first presented to Bank: November 1975 (d) First Bank mission to review project: December 1975 (e) Departure of appraisal mission: October 1977 (f) Completion of negotiations: April 1978 (g) Planned date of effectiveness: November 1978 Section II: Special Bank Implementation Actions Advance contracting for expenditures of about US$700,000 undertaken to avoid serious delays in project implementation and achieve one earlier crop year (see paragraph 71). Section III: Special Conditions (a) Bank would enter into two separate Project Agreements, one with Vodostopanstvo and the Commune of Bitola and the other with the Republic of Macedonia (Condition of Effectiveness, paragraphs 54 and 55); (b) Vodostopanstvo would establish a project unit (BOAL Strezevo) with a qualified and experienced director and appoint a financial director prior to the effectiveness of the Bank loan, would appoint other key staff to the project unit by December 31, 1978 (Condition of Effectiveness, paragraph 54) and submit personnel training program for Bank review (paragraph 58); (c) Vodostopanstvo would not undertake any other major invest- ments that would interfere with the completion of the project (paragraph 57); ANNEX III Page 2 of 2 (d) Specialist consultants to review with Vodostopanstvo final design of irrigation pipe network (paragraph 56) and assist Republic of Macedonia in preparation of irrigation feasibility studies (paragraph 58); (e) Appointment of independent advisory board on construction (Condition of Effectiveness, paragraph 56) and periodic inspections of dam and appurtenant structures after com- pletion (paragraph 56); (f) Vodostopanstvo to prepare annual implementation plans for * operation of irrigation system and cropping patterns (para- graphs 57 and 66); (g) A subsidiary loan agreement between Stopanska Banka Skopje (SBS) and Vodostopanstvo would be entered into and finan- cing arrangements, including SBS cost overrun guarantee, and water users agreements to be duly authorized or rati- fied prior to the effectiveness of the loan (Condition of Effectiveness, paragraph 61); (h) Irrigation charges would be phased in by gradual increases, to full rates as agricultural production approaches full development andt Vodostopanstvo to undertake in consultation with the Bank cost recovery analysis prior to first water deliveries so that rate or other adjustments may be recom- mended (paragraph 63); (i) Republic of Macedonia and Commune of Bitola to undertake to provide funds on terms and conditions acceptable to the Bank to cover Vodostopanstvo's financial deficits which are expected to occur during the period before irrigation charges are fully phased (paragraph 65); (j) Advanced contracting and retroactive financing of about US$700,000 (paragraph 71); REN~~~~~~~~~~~~~~~ \ MAaDOT SEZEVO RRIGATO PROECT ,PROAdC LOCAM~N \ < a \ - TITOV VELX X X 0 X BEROVOt / ' ~~~~~~~~~~~~~~~~~~~~~OELEV -F- I ~~~~~~~~~~~~~~~~~~~~~~~~~~~~SI NOAM.,, IBRD 13405 ~~ // ~~~~YUGOSLAVIA \ r MACEDONIA- STREZEVO IR IGATION PROJECT 0 _ \ X j3 GENERAL LAYOUT tSCi*40 ~~~~~~~~~~~~~~~~~~~~~4/ 4 ~~~~~~~~~~PROJECT 4 0 2 *t 'um''S~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~C I e I on 0 n I S-. .dor, P.pe..lh- Po-ed R.-,;- .X.h D. 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