'CIRCULATING COPY C

DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENTINTERNATIONAL DEVELOPMENT ASSOCIATION

Not For Public Use

Report No. P-1309a-YU

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO

LIVNICA ZELJEZA I TEMPERA - KIKINDA

WITH THE GUARANTEE OF

THE SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA

FOR AN

IRON FOUNDRY PROJECT

November 5, 1973

[This report was prepared for official use only by the Bank Group. It may not be published, quotedor cited without Bank Group authorization. The Bank Group does not accept responsibility for theaccuracy or completeness of the report.

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Currency Equivalents *

Currency Unit Yugoslav Dinar (Din)

US$1 Din. 15.5

Din. 1 US$0.0645

Din. 1,000 US$64.52

Din. 1 ,000 ,000 Us$64,520.

Fiscal Year January 1 to December 31

The Yugoslav Dinar has been floating since July 13, 1973. The currency

equivalents given above are as of Octcber 16, 1973.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A

PROPOSED LOAN TOLIVNICA ZELJEZA I TEMPERA - KIKINDA

WITH THE GUARANTEE OFTHE SOCIALIST FEDERAL REPUBLIC OF YUCOSLAVIA

1. I submit the following report and recommendations on a proposed loanto Livnica Zeljeza i Tempera - Kikinda (the Kikinda Iron Foundry), with theguarantee of the Socialist Federal Republic of Yugoslavia, for the equivalentof US$14.5 million to help finance an iron foundry project. The loan wouldhave a term of 14 years, including four years of grace, with interest at 7-1/4percent per annum. The Government of the Socialist Autonomous Province ofVojvodina, which would provide a prior guarantee required under l'ugoslav law,would charge a guarantee fee of 1-3/4 percent per annum on the outstandingamount of the Bank loan, bringing the cost of the loan to the enterprise to9 percent per annum.

PART I - THE ECONOMY

2. An econcmic mission visited Yugoslavia in October/November 1972, anda basic report on the economy of Yugoslavia is under preparation. A reportentitled "Current Economic Position and Prospects of Yugoslavia" (R72-141) wasdistributed to the Executive Directors on June 7, 1972. Basic data on theeconomy of Yugoslavia are given in Annex I.

3. Yugoslavia has had rapid growth and rising living standards duringthe last decade, with total GDP at constant prices having increased at about5-1/2 percent per year and per capita GDP at over 4-1/2 percent per year.Economic growth has proceeded in an environment of major institutional andorganizational changes, characterized by the decentralizing of economic man-agement, the creation of a market economy, and the opening up of the economyto international trade, with the objective of increasing economic efficiencyand improving the allocation of resources.

4. The population growth rate averaged 1.0 percent per year in thelast ten years; the rate in the less-developed Republics was 1.6 percent com-pared to 0.7 percent in the developed Republics. There is little open unem-ployment. There is, however, some evidence of growing regional and occupa-tional imbalances in labor demand and supply. This results from the lowmobility between labor surplus less-developed regions and labor-scarce de-veloped regions, and a discrepancy between the skills needed in a fast-changingeconomy and those supplied by the present education system.

5. Economic growth in the less-developed regions has been at about thesame rate as that of the more developed, but their per capita income has in-creased more slowly because of faster population growth. Consequently, re-gional inequalities have widened. Yugoslavia has had an active regional

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development policy for more than two decades. The policy aims at reducingregioiial inequality by achieving a growth rate above the national average inthe less-developed regions, financed by a transfer of resources mainly throughthe Fund for the Accelerated Development of Underdeveloped Regions. In addi-tion, Federal budgetary grants are provided to the less-developed regions forcurrent expenditure for social purposes such as health and education.

Recent Developments

6. Economic development since 1968 has been characterized by a rel-atively rapid increase in exports and production (averaging 12 and 7 percentper year respectively during 1969-1972), the emergence of serious inflationarypressures and substantial balance of payments deficits (averaging $220 millionduring 1968-71).

7. To counter the rising inflationary pressures and improve the ex-ternal payments position, the Government since 1969 has adopted measures airfLedat restricting monetary expansion, limiting public expenditures, strengtheningprice controls and developing an incomes policy. In addition, it has adopteda policy of frequent exchange rate adjustments in order to neutralize theeffect of inflationary pressure on the balance of payments. After a periodof unchanged rates, following a major devaluation in 1965, the dinar wasdevalued by 16.6 percent in January 1971. In the course of the internationalcurrency realignment in December 1971, Yugoslavia devalued again by 18,8 per-cent against gold and by 11.8 percent against the dollar. Following the morerecent devaluation of the dollar, Yugoslavia adjusted the gold parity of thedinar to maintain its parity with the dollar until mid-July 1973. Since thenthe dinar has been floating vis-a-vis the US dollar along with other Europeancurrencies.

8. Largely as a result of the policy measures undertaken since 1969,export growth picked up, import growth declined, and the investment boom sloweddown. In 1972, exports of goods increased by 20 percent anid imports bV about5 percent and the trade deficit was $1.1 billion dollars compared to $1.4 bi>lion in 1971. Workers' remittances increased by 25 percent to $780 million in1972. Consequently, the current account showed a surplus of about $190 millioncompared to a deficit of about $320 million in 1971. Foreign exchange reserves,which were equivalent to about one months' imports in 1970 and 1971, have in-creased and, at the end of 1972, were equivalent to nearly three months' mer-charLdise imports. There has been some slowdowrn in the rate of price inflationin 1972. The cost of living index increased by about 11 percent during theyear compared to 17 percent during 19751. owever, diespite serious efforts tocontain inflationary pressures, price increases accelerated in 1973.

Prospects

9. Real GDP is expected to grow by about 6 percent in 1973 (about thesame rate as the average for 1971 and 1972) reflecting Government policiesto control the expansion of investment and consumption. The reduction ofexcess aggregate demand together with the recent devailuations and continuedeconomic growti-h in its main trading partners is expected to lead to export

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growth of about 12 percent this year. Reduction of tariffs in mid-1972 anda major import liberalization program effective since January 1973 are likelyto encourage import growth of about 12 percent. Even with this anticipatedincrease in import growth the balance of payments is expected to show a sur-plus. Inflationary pressures are to be reduced by a continuation of pricecontrols and restrictive demand management.

10. The 1971-1975 Social Development Plan, adopted in June 1972, aimsat an overall growth rate of 7.5 percent per year with gross investments grow-ing at the same rate as production, and private consumption and governmentexpenditure somewhat slower. The Plan stresses the importance of achievingdomestic stabilization, improving resource allocation and increasing produc-tive efficiency to attain these targets. Domestic savings rates are expectedto be maintained at the present level of around 22-24 percent of GDP, andwould finance about 80 percent of gross investment. The bulk of the pro-jected external resource gap would be covered largely from rising workers'remittances from abroad. Exports are projected to grow at about 11-13 per-cent per year and imports at about 9-11 percent annually. Agricultural pro-duction is expected to grow at an average rate of 3.2 percent per yeer com-pared with 2.2 percent annually during 1965-70. Industrial production isprojected to grow at an average rate of 8 percent and industrial exports atabout 12 percent per annum compared with 6 percent and 10 percent respectivelyduring 1965-1970. Present indications are that, with both total exports andimports running at higher than Plan projected rates, and the current accountin surplus during 1973, the Plan targets are reasonable.

11. The prospects for continued economic growth in the medium-term aregood. The endowment of natural and human resources, the pragmatic approachto economic problems, the readiness to consider and undertake necessary in-stitutional changes, and the strong commitment to an open, market-orientedeconomy, gives ground for a favorable assessment of future prospects.

External Assistance

12. Gross capital inflows have more than doubled in the last five yearsreaching US$860 million in 1971, and an estimated US$930 million in 1972.Most of these funds are medium-term commercial credits, reflecting the limitedassistance coming from governments, and the liberalization of foreign tradeand borrowing regulations following the 1965 Economic Reform. The inflowof bilateral and suppliers' credits has been largely from the United States,Germany, Switzerland, Italy and the United Kingdom. IBRD loans have beenthe main source of long-term capital since 1968. Yugoslavia has, so far,not been able to place public bond issues on the world capital markets. How-ever, three private placements (medium-term) totaling US$115 million havebeen made in 1972 in the U.S., and other possibilities for raising long-term funds are being explored. In October 1972, an agreement was reachedwith the USSR for credits equivalent to a total of 540 million clearingaccount dollars for financing the energy, ferrous and non-ferrous metal,cement and shipbuilding industries.

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13. The Government has tried to encourage private foreign investmentthrougOt special legislation in 1967, and by April 1973, 79 joint venture

agreements had been signed b;etween local and foreign enterprises, involvinga total investment of about US$110 million. The conditions for foreignpartners in joint ventures withl Yugoslav enterprises have recently beenrurther improved in an effort to encourage a more rapid flow of foreigninvestmeCut.

E;xterual Debt Mlana3gement

14. Thle pattern of capital inflow since the ririd-1960's nas led to adeterioration in the inaturity structure of external debt. The Government,being aware of the dangers irk the uoregulated growth of external debt, hasembarked on .an active debt management policy. Since mid-1971, all foreign

credits hiave to be registered with the National B.ank to ensure that contractedcredits reimain within the ceilings determined by the Federal Government andthe National Bank, and that the terms of borrowing -are appropriate to thetransaction anLd to tue general economic situation. In connection withi theStandby Ag,reemenl with the I_MF signed in July 1971, the Government decidedto limijt outstandling short-terra credits to the 1970 level, ard maediumi- andlong-term loans incurred or guaranteeci by the banks to US$900 million, andhas been borrowing within these limits since tn Ii. 1i April 1972, a newsystem for regulating external borrowing was adopted which operates by in-fluencing the cost of external borrowing through varying dinar deposit re-quireiments according to tihe terms and purpose of the credit. Mloreover, theNational L,ank has been given authority to veto any credit arrangement. TheGoverrmtenit has also e-mbarked on a stabilization prograi that includes re-scheduling or refinancing existing debts. The United States agreed to re-schedule US$58.5 millicn of debt paynents falling due in 1971 and 1972. Italy,Germanv, France., Japan, Belgium and the Netherlands agreed to extend financial

credits totalling US$277 million during 1972-1975 (Germany $142 million, Italy$75 m-iilion, Japan $30 million, France $20 million, Belgium $5 -million, Nether-lands $5 million) on terms which will not, however, affect the structure ofYugoslav debt.. The Government hopes to secure another $180 million from,Western European countries during 1973-75.

15. Total external public and publicly-guaranteed debt outstanding asof December 31, 1972 was US$1,730 million. In addition, there was USS1,820million non-guaranteed external debt outstanding on that date. Total debtservice payments in 1972 are estimated at about US$796 rmillion, mostly inconvertible currencies, and representedi 2(0 percent of the country's foreignexchange earnings. Thte pcrcentage increases to 24 oercent if the debts andearninrs in norn-conivertible currencies are excluded. The debt service ratiois expected to remain at about the 1972 level during the next five years.Taking into accouint Yugoslavia's debt service record and the new measuresfor imiproved external debt managemrent, the prospective growth of productionand exports and the expected increase of foreign exchange earnings from tour-ism and workers' remittances, Yugoslavia is creditworthy for substantial Banklending.

PART II - BANK GROUP OPERATIONS IN YUGOSLAVIA

16. The Bank has made 23 loans to Yugoslavia totalling about US$750 mil-lion, equivalent. The proposed loan would be the first direct loan for indus-try in Yugoslavia. Of the previous loans for industry (four loans totallingUS$46.9 million), three have been channelled through the Yugoslav InvestmentBank and one through the Yugoslav Government. Bank lending, however, has beenconcentrated in infrastructure projects such as transportation (five highwayloans totalling US$150 million, three railway loans totalling US$155 million,and one gas pipeline loan of $59.4 million), power (three loans totallingUS$135 million), telecommunications (US$40 million) and three multipurposeprojects (totalling US$103 million). Loans have also been made to tourism(two loans totalling US$30 million) and for an agricultural industries proj-ect (US$31 million). IFC has made six investments totalling about US$56 miL-lion in Yugoslavia. Its most recent participation, $13.7 millior in theBelisce/Bell joint venture for manufacturing pulp and paper, was approved bythe Executive Directors in January 1973.

17. There have been delays in the execution of many projects, partic-ularly the Railway Modernization Program of FY65 (Loan 395-YU), the Belgrade-Bar Railway Project of FY68 (Loan 531-YU) and the Babin Kuk Tourism Projectof FY71 (Loan 782-YU). Part of the reason for the delays stems from thecnangeover to decentralized political and economic management in Yugoslavia;the problems are exacerbated by financial and technical difficulties, costoverruns and the lack of domestic financing. The Bank has maintained andincreased its efforts to deal with these problems, especially in providingassistance to review the situation of the railways and in increasing thenumber of supervision and other missions; the situation is improving. AnnexII contains a summary statement of Bank loans and IFC investments as ofSeptember 30, 1973 and notes on the execution of on-going projects.

18. The major objectives of Bank lending to Yugoslavia are (a) to ac-celerate development in the less-developed regions of the country; (b) topromote structural reforms in major sectors of the economy through improvedcoordination, the strengthening of institutions and technical assistance,(c) to help provide Yugoslavia witlh long-term external canital and thus helpredress the excessively short-term character of Yugoslavia's external borrow-ings; and (d) to help alleviate Yugoslavia's shortage of foreign exchange byfinancing export-oriented projects. These objectives are basically the sameas those which guided lending in previous years, but efforts to give specialsupport to the less-developed regions are being strengthened, and a continu-ing high level of technical assistance will be provided in appropriate cases.

19. To achieve these objectives, loans to further support railway mod-ernization, a tourism project in Jaz (Montenegro), expansion of the port fa-cilities of Bar, river regulation, urban pollution control, roads and high-ways, and a water and sewerage project (tourism infrastructure) in Dubrovnikare envisaged during the next two years. Also planned for this period are anindustrial line of credit to assist small- and medium-size industrial enter-prises, and two or three direct loans for specific industrial projects that

are of vital importance to the country but which are unsuitable for IFC par-

ticipation and for which private foreign financing on reasonable terms is

not available. IFC is currently investigating several new investment oppor-

tunities to encourage joint ventures which will provide, apart from iong-term

capital, technical, management and marketing expertise.

20. In addition to help with the preparation of projects for Bank fi-

nancing, the Bank's recent technical assistance to Yugoslavia has incluided

reviews of the power, tourism and transportation sectors. Other current Bank

activities include assistance to a project appraisal training institution and

training some of its teachers; assistance with a study of the Yugoslav capital

market which should help improve resource mobilization and allocation; and

help in establishing a training program for auditors in Yugoslavia's Social

Accountin- Service, which audits several Bank-financed projects.

21. Bank commitmnents to Yugoslavia have averaged close to US$100 million

annually in the last three years. Although this represents only a relatively

small proportion of the country's need for external finance, it is equivalent

to about two-thirds of the annual long-term official capital inflow in con-

vertible currencies. The outstanding debt to the Bank could rise from the

level of 12 percent of Yugoslavia's total external debt in 1972, to 19 per-

cenit by 1978. Service onl Bank loans as a proportion of total debt service

would increase from 4 percent to 7 percent during the same period.

PA{T Ill - TrL INEDUSTRIAL SECTOR IN YUGOSLAVIIA

22). The mair objective of Yugoslavia's development strategy during the

past two *iecades has been the transformation of a predominantly primary pro-

ducing economyv in,o a highly industrialized economy. Rapid industrialization,

modernization and integ.,ration of the economy with the world market hiave been

emphaasized. inrdustrial. development policy has included both import substitu-'

tion and export promotion with the emphasis varying according to branches andc

their stage of development. In the first postwar decade priority was given

to investments in heavy industries and power generation. In the late 195O's

the strategy changed to thle st-imulation of manufacturing industries. Sincc

the denendenc:y of the economy on imports, particularly of raw materials and

investment goods, increased significantly, thie policy followed in the current

Five-Year Social Development Plan (1971-1975) emphasizes tihe reed to accelerate

tiie development of domestic resource-based industries, both for export and for

lomestic manufacturing intdustries.

'3. IncdtLstry has played a key role in Yugoslavia's economic ,rowth. It

accounts for about one-thircd of CDP, one-half of economic investments and

I3 percent oi' social sector 1/ employment. Industrial output rose at about 9

percent annually in real terns over the last decade: industrial exports grew

at about 14 percent annualily and accounted in 1971 for 8, percent of total

merchandise exports. As a result of its diversified production and export

1/ The sociq1 sector covers all enterprises save for small, private concerns

in agricult;ure an! the retail trade.

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structure and persistent efforts to increase efficiency in industry,

Yugoslavia has become more competitive in the world markets, particularly

in the highly competitive lWestern markets. The industrial sector has con-

cluded a number of cooperation and joint venture agreements with foreign

partners.

24. Despite a long period of rapid growth, the development of the in-

dustrial sector has suffered from a number of problems including deficiencies

in countrywide coordination of investment planning, lack of mobility of both

labor and capital, distortions in the allocation of resources, and increasing

dependence of the industrial sector on raw materials and investment goods im-

ports. Growing foreign debt service payments of industrial enterprises due

to heavy short- and medium-term borrowing on relatively hard terms over the

last five years, have increased the need for long-term external finance.

25. The Bank's lending to industry is directed at supporting the Govern-

ment in its efforts to improve the allocation of resources, reduce import

dependency and strengthen the export capacity of the industrial sector. It

also will help to improve the structure and terms of the industrial sector's

external borrowing. The proposed project is in line with these objectives.

26. In the Social Development Plan for 1971-1975, industrial output is

expected to grow at 8 percent per annum with the production of ferrous and

non-ferrous metals increasing at 10 to 12 percent and metal manufacturing

industries growing at 8 percent per annum. Special emphasis is given to

thie development of domestic raw material and semi-manufacturing production,

to reduce the import dependency of the industrial sector. Steel and steel

products are expected to grow at around 15 percent per year to meet 70 per-

cent of the estimated domestic demand by 1975.

27. Rapid develooment is foreseen, particularly for sub-sectors such

as a-ricultural machinery, motor vehicles, machine tools, electrical and non-

electrical equipment, rail wagons, construction and shipbuilding industries

which are expected to register annual average growth rates ranging from 9 to

19 percent. As these industries are major consumers of iron castings, the

domestic demand for these castings is likely to increase from 375,000 tons in

1973 to about 609,000 tons in 1977. Adding to this the expected export demand,

and taking into account the presently conceived expansion plans, including the

proposed project, and projected imports, which consist mainly of itenms that are

not domestically produced, Yugoslavia is expected to have a shortage of about

109,000 tons in 1977. Even if no castings were exported the expected demand

would exceed the supply by 9,000 tons in 1977.

PART IV - THE PROJECT

28. Following an industrial projects identification mission in April

1971 , the Covernment in May 1972 subrmitted eight industrial projects to the

T.ank for financing, including the expansion of Liviica Zelieza i Tempera -

Kikinda (Kikinda) A Bank mission in ])eccinber 1972 assisted in the preparation

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of the project, whlich was apnraised during April/May 1973. Negotiations were

held during, September 1973 in Washington. The Yugoslav delegation was ledby Mr. Gavra Popovic, Assistant Federal Secretary for Finance, and included

representatives of the Federal Government, the Government of the Socialist

Autonomous Province of Vujvodina, Jugobanka and Kikinda (the Borrower).

29. The propcsed loan would be the first direct Bank loan for ar. indus-

trial project in Yugoslavia. IFC, which gives priority to joint ventures be-

tween Yugoslav and foreign eriterprises that provide, apart from long-term

capital, technology, management and marketing expertise, does not regard the

pruject as suitable for its financing, since Kikinda neiLher needs nor wants

foreign participation to provide technology or market outlets. Kikinda's

efforts to obtain external f'inance on reasonable terms from other foreign,

sources before approaching the Bank were not successful.

Thle Borrower

30. The Kikinda Iron Foundry is an autonomcus, self-managed, socially-

owned enterprise located at Kikinda, a town aDout 130 km north of Belgrade

in the Socialist Autonomous Province of Vojvodina. It is one of the mnajor

castings producers and the sole producer of grinding machines in Yugoslavia.

Kikinda started operations in 1908 with a brick factory and has since added

various new production lines and undlertaken a series of expansion programs,raising its annual production capacity to the following current levels:

malleable castings, 11,500 tons; nodular castiags, 4,500 tons; gray castings,

900 tons; finishedl pipe fittings, 4,000 ,ons; ancd machine tools, 350 units.The plants are well-o-perated and maintained.

31. Kikindn's organization follows the general Yugusiav concept of de-centralized economic decision-making, autonormy Of the enterprise and workers'

self-managemant of social property. The policy-making 'Dody for each etnter-prise 4zs a Workers' Council which is elected by the personnel of the enter-prise; the Cuuncil appoints the Gcrneral Manager and the 1,xecutive Board con-

sisting of iiinre ml-embers (including the General Mianager). Kikinda's imanage-menit aind staff are well-trained and experienced.

'i'. In 14)67, under L.oan 504-YUJ (clhanneled through tihe Yugoslav in-vest-ment Gank) Kikind_a r-cei.ved the equivalent of US$1 .1 nillion, to meet the

ftoreign exchanjge costs of eoxpandinig the malleable founrdrv and replacing ain

old gray iron foundry with a new facility for the prodiuction of both gray

and nodutilar castings, Cost overruns causeci by inflatioT zanci exacerbated byiKikinda's unfamiliarity withi international competit:ive bidding procedures

delayed project completion by one year unftil 1971. in 1972 the enterprise

borrowed [US$348,000, equivalent, in London to increase further its capacity

for nodular castings from 4,500 to 7,500) tons annually by the end of 1973.

This expansion prograrn is nearing completion as scheduled.

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Project Description

33. The proposed project is of key significance for Yugoslavia's indus-

trial development as outlined in the Social Development Plan of Yugoslavia for1971-1975. It is also in line with the Social Development Plan 1971-75 of

Vojvodina. Both the Federal Government and the Government of Vojvodina aregiving high priority to this project.

34. A Loan and Project Summary is attached as Annex III. The Appraisal

Report entitled "Appraisal of Kikinda Iron Foundry Expansion Project", No.

218a-YU, dated October, 1973 is being distributed separately to the Executive

Directors. The project would include:

(a) expansion (from 11,500 to about 21,000 TPY) and modernizationof the malleable foundry;

(b) expansion of the gray and nodular foundry (from 8,400 to about

18,000 TPY);

(c) expansion (from 4,000 to about 6,400 TPY) and modernization of

the fitting finishing shop;

(d) expansion (from 350 to about 460 units annually) and moderniza-

tion of the machine tool plant, including the introduction of

new production lines for precision and internal grindingmachines;

(e) a streamlined storage and materials handling system;

(f) expansion and modernization of the existing utility

installations;

(g) construction of a connection with the railroad system; and

(h) installation of equipment for dust and fume extraction.

35. The proposed facilities were chosen to increase and modernize thecapacitv of the existing plants and further improve product quality and pro-

ductivity. The project would be implemented during 1973 to 1977 without sig-

nificantly interfering with production in the existing facilities.

Project Execution

36. After implementing several expansion programs, the personnel of

Kikinda is well experienced to carry out the project. Kikinda has agreed toassign to it qualified full-time staff, under the leadership of an experiencedfoundry expert, for the implementation of the project. The arrangements wouldbe adequate to insure proper project execution.

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37. The enterprise appointed an experienced firm of engineering consul-tants in September 1973 to assist in the preparation of specifications for inter-national competitive bidding and evaluation of tenders. Civil construction anderection of equipment would bDe carried out by Yugoslav contractors, whileKikinda's own construction department would be responsible for additions andalterations to the existing facilities. Equipment suppliers would provideassistance in erection and start-up and a performance guarantee.

Project Cost

38. The total cost of the project, including start-txp costs and incre-mental working capital but excluding duties and taxes of US$3.0 million, equiv-alent would be US$32.1 miliion, with a foreign exchange component of US$15.7million, (about 49 percent of the project cost excluding duties and taxes).The proposed Bank loan would cover 92 percent of the foreign exchange ^ost.Interest during construction would amount to USs:3 million. (See also para.39). Equipment cost estimates are derived from quotations received in thefirst quarter of 1973 from suppliers in six western countries. The prevail-ing import duties and taxes of about 27 percent on the c.i.f. value of for-eign equipment (Yugoslav border) have been added. Pre-operating and start-upexpenses are based on Kikinda 's previous experience. Civil engineering andconstruction costs are based on quotations received by the Com-Dany in early1973. Physical contingencies equivalent to 10 percent of equipment and civilworks cost estimates would be adequate. T'he price contingency provision isbased on the assumptions of a 6 percent per annumn annual in2crease for foreign

exchange costs and annual increases for locai costs of 10, 8, 6 and 6 percentin 1973, 1974, 1975 and 1976, respectively. Increuiental working cap:Ltal re-quirements due to the project would be US$6.6 million, of which about $0.7million equiv-alent would be needed in foreign exchange.

Financing

39. The proposed Bank loan of US$14.5 millioni, would finance the entireforeign exchange costs of equipipment: and snare parts. Irthe remainiing financind-required of US$23.6 million, includingŽ incremental wo-rkini-i capital and int&:ms;during construction, would be met fronm internal cash generation. Should actualfinancing requirements in domestic or foreign currencies at any time exceecthe internal cashi generation, Kikinda would finance them with credits from

Jugobanka - Novi Sad. An agree,ment between Kikinda and Jugobanrka - Novi Sadto this end wculd be. concluded.

Cost of Loan

40. A fee of 1-3/4 percent to accrue to the Socialist Autonomnous Provinceof Vojvodiina would be charged for guaranteeing 'I./ the Bank loan. Thus the

1/ Under Yugoslav law withn respect to Zank loans to enterprises, the FederalCovernment, whlich wo'ud bc the guarantor of thwe proposed Bank loan, isrequired to obtain a prior guarantee frorm the Government of the Republicor Autonomous Province concerned, in this case Vojvodina. The enterpriseis also required to obtain a guarantie from a local bank, in this caseJugobanka - Novi Sad.

effective cost of the Bank loan to Kikinda would be increased by 1-3/4 percent

above the Bankrs interest rate to a total of 9 percent.

Financial Position

41. Kikinda has a sound financial position that provides a good basis

for expansion. Kikinda's estimated net income of Din. 62 million in 1973 is

expected to increase by about Din. 75 million, or about 120 percent between

1973 and 1977; net sales are projected to increase by Din. 415 million, or

by about 139 percent during the same period. Net income increases less ra-

pidly than net sales because higher inflation rates are assumed for production

cost inputs than for sales, proportion of which would be exports. Since a

major portion of the project cost would be financed from the enterprise's

internal cash generation, its debt service burden would remain low. Kikinda's

liquidity position is satisfactory and is expected to improve during project

implementation. The ratio of current assets to current liabilities is ex-

pected to increase from 2.3 in 1972 to 2.6 in 1977 and remain at that level

thereafter.

42. The project would have an incremental financial rate of return in

current prices of about 23 percent compared to the financial return on

Kikinda's existing operations of 8.4 percent. In order to maintain a sound

financial position, Kikinda has agreed that, without the prior consent of

the Bank, it would not:

(a) until the completion of the project, undertake new investments

or incur new debts in excess of Din. 20 million, equivalent,

in any one year, other than for the project; and

(b) following the completion of the project, distribute net incomeand/or make other cash outlays other than for normal operations

if the current ratio were to fall below 2:1 after such profits

distribution and/or cash outlay.

Following the completion of the project, Kikinda would consult the Bank prior

to incurring new financial obligations or undertaking new investments in ex-

cess of Din. 20 million, equivalent.

Markets

43. Markets for Kikinda's products appear well assured and the enter-

prise has established a good name for high quality, both at home and abroad.

The development of the domestic market is directly linked to the expected

expansion of industries in Yugoslavia such as agricultural machinery, elec-

trical equipment, building construction, commercial vehicles and automobiles,

machine tools, consumer durables, rail wagons and shipbuilding. Their rapid

growth is dependent on the availability of castings and machine tools which,

if domestic output is not expanded, would hiave to be imported under tight

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world supply conditions, especially for castings. Kikinda has also estab-

lished a strong and competitive position in foreign markets. In 1972, nearly

35 percent of the sales revenue of US$19.1 million, equivalent, came from ex-

ports, more than half of which was to convertible currency areas. By 1977,

when the project is expected to be fully operational, exports are expected to

account for more than half of total revenue estimated at US$46 million, about

three quarters of total exports would be to convertible currency areas. Kikinda

has already secured most of its projected exports through long-term sales con-

tracts with a few foreign companies, and is negotiating with others for similar

contracts. Concernina the availability of inputs, Kikinda appears to be well

assured of its domestic raw material and import reciuirements.

Procurement

44. The equipment and spares to be financed by the proposed Loan would

be divided into 21 packages and would be procured in accordance with Bank

guidelines. Equipment packages costing over US$100,000, equivalent, eacn (15

packages) would be procured by international compet:itive bidding, while t:he

remaining 6 packages costing less than US$100,000, each (totalling less tharn

6 percent of total foreign equipment costs) would be obtained through a pro-

cedure under which the borrcoer may award contracts after having received at:

least four comparable bids from qualified suppliers in at least three eligi-

ble countries. Since it is not expected that Yugoslav manufacturers would

bid on the equipment to be procured under the loan,, preference would be given

to clearly identified Yugoslav components of foreign bids to the extent of 15

percent of the price of such components or the actual custorms duty levied on

similar imported components, whichever is less, for purposes of bid cous'pari-

son.

Disbursements

45. The Bank loan would be disbursed against the actual forelgn exchange

cost (c.i.f. Yugoslav border or port entry) of equipment and spare Darts tor

the project. Disbursements would take place ove-r three years fron, the ben-ning of 1974 to the beginning of 1977. A schedule of estimated disbursa;encs

is given in the Loan and Project Summary (Annex III).

Environment

46. Kikinda would install devices for dust and fume extraction in its

foundries at a coSt of about Dini. 10 million, representing some 10 percent

of the foundry equipment cost of the project. Th1ese neasures are judged to

provide adequate pollution control and the Bank has received assurances from

the enterprise that they would be implemented.

Labor Force

47. With a total of 2,.084 employees at the end of 1972, including 415

persons in the machine tool plant, the enterprise is a major employer in the

area. The project is expected to double the labor productivity and to raise

the number of employees by 626 or 30 percent. Thie Bank has received assur-

ances from the enterprise that it would maintain ar. adequate labor force to

meet fully the needs of the project.

- 13

Aud it

48. Kikinda' s accounts would be audited by the Social Accounting Service(SAS), which is an autonomous governmental agency responsible for financialinspection of Yugoslav economic enterprises. It audits several Bank-financedprojects. SAS is currently planning a training program to begin in January1974 under which its staff will be trained by an international accountingfirm in auditing methods consistent with Bank requirements. It is likelyto be some time before it will be possible to fully realize the objectiveof the program. In support of the training program, Kikinda has agreed toinvite the SAS to undertake the audit of its accounts in the next two yearsas part of the SAS's on-the-job training of its staff, in collaboration withthe international accounting firm with whom SAS is cooperating in the train-ing program. In addition the Government has undertaken that, if SAS cannotperform a satisfactory audit, it would retain an independent auditor for thistask.

Justification

49. The incremental economic rate of return for the project would beabout 18 percent. The calculation is based on export prices (c.i.f. border)of Kikinda to the convertible currency area for sales revenues, and on c.i.f.border prices for material inputs and on market wage rates for labor costs.The sensitivity analysis shows that even under pessimistic assumptions theproject would havae a rate of return of more than 10 percent.

50. The project would help overcome a major constraint on long-terraeconomic growth in Yugoslavia, i.e. the shortage of convertible foreign ex-change, by providing a variety of rapidly expanding industrial inputs whichotherwise would be imported and also by significantly increasing the coun-try's foreign exchange earnings. The net foreign exchange earnings (mostlyin convertible currencies) of Kikinda would increase from about US$7 million,equivalent, in 1973 to about US$23 million, equivalent, in 1983. Gross foreignexchange earnings from exports and savings through substituting imports to-gether would increase from US$19 million, equivalent, in 1973 to US$55 million,equivalent, in 1983.

51. The project is of key significance for Yugoslavia's industrial de-velopment. The further growth of the country's engineering industries, par-ticularly those producing mac hine tools, agricultural machinery, motor vehi-cles, ships, electrical and non-electrical equipment and consumer durables,is dependent on the expansion of castings production. Some of the enterprisesin these sub-sectors have already started their expansion in anticipation ofthe additional castings and machine tools from this project.

52. The project is also crucial for the industrial development ofVojvodina. It would help diversify the predominantly agrarian structure ofVojvodina and lay the base for industries that could help absorb the increas-ing number of workers leaving the agricultural sector. About 600 new jobswouldi be created in Kikinda and about 1000 indirectly in industries suppliedby Kikinda.

- 14 -

PART V - LEGAL IINSTRUMENTS AND AUTliORITY

53. The draft Loan Agreement between the Bank and Livnica Zeljeza iTempera - Kikinda, the draft Guarantee Agreement between the Socialist FederalRepublic of Yugoslavia and the Bank, the Report of the Committee provided forin Article III, Section 4(iii) of the Articles of Agreement and the text of aresolution approving the proposed loan are being distributed to the ExecutiveDirectors separately.

54. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank.

PART VI - RECOMII4ENDATION

55. I recommend that the Executive Directors approve the proposed loan.

Robert S. MlcNamaraPresident

by S.Aldewereld

Attaclhments

October 16, 1973

ALNNhX :1Page Iof 3 Pages

COUNTRY DATA -_YIXGOSLAVIA

AREA POPai.TION DENSITY75. mI i 2 20.7 mslli,, (mid-1971) 81 Per k 2

210/5 Per kms2of arable land

SOCIAL lINDICATORS

Reference Countries

ONU' PER CAPITA U5$ (ATLAS BASIS) 5375 650 670 1,020 1,760OEEIImAPIdIC

C-uJW-rt rate (per thousand) 21, 18 Lb 20 16.8Crude deati, rats (per thousand) 10 8 9 8 9.7Infant mortality rate (per thousand live births) 88 56 67 28 29.7Life expectarcy at birth (years) 6? 65 62 71 71.1

Gros. reproduction rate, 1L3 1.3 3.1 1.L 0.9Population growth rate L2 1.2 1.0 3.5 1.1 0.8Population growth rate - urban h*5 3.3 5.0 .. 0.7 /a.bAgn etruCtLIre (percent)

0-11 31 28 4,6 28 21.315-6L 63 61 50 63 61.965 and oler 6 8 1,9 10.7D-endancy ratio IA 0.9 0.8 /c1.6 Ic 1.0 Ic 1.0 IUrban population as percent of total 28 35 59 .. 93 /a.iFamily pla,ming: Nla of acceptors cumulative (thous.) ...

No. of users (% of narried wesse)

EMPLOYMENTTotal labor force (thoUsands) 8,310 9,600 15,900 1753/d 19,600 IePercentage employed in agriculture 57 52 17 30 71- 17Percentage unemployed 6.7 If 7.7 .. 1.5 71- 3

INCOME DISTRIBUITIONParcent of nationa2l income received by highest 5% 9.2 Ij 13.1 /h. Percent of nutional inco.e received by highest 20% ...Percent o- national income received by lowest 20% -1.5 /I 13.5AI ~ .Percent of national income rocei-ed by lowest 10% .

DISThRIBUTION OF LeND OhAERSHIPwe yt-o-p 10% -ofown-ers ..

% owned by smallest 10% of owners..,

HEALTH AND 4JTRITIONpe-.fatio rP py s Ic Ian I 1,00 If 1 ,000 1,650 Ii 760 Icj 550Population per nursing person . 790 Ih . ,530 7-Population per hospital bed 190 I 180 550 lb 220 100 /d

Per capita calorie supply as % of requirements /5 119 /l 125 Ii 108 lb 111 ill /kPer capita protein supply, total (grams per day)Y/6 91 7-i 92 7h 66 7- 80 86 71Of which, animal and Pu~lse 27 71 2971 28 1, i2 7kDeath -ate 1-1, years 17 L.77f 2.6w 8.97 .. 1. 7EDUCATIONAdjusted /3 primary school enrollment ratio . 91 /d 71 91 106 /dAdjusted 71 seconudary school enrollment ratio 31 15 7- 19 55 56 7dYears of schooling provided, first and second level 12 12 12 15 13-Vocational enrollment as % of sec. school enrollment 75 59 Id 23 Im 72 I 26 /dAducli literacy rate % -77 85 76' 91 91 71n.0

Average No. of p.rsons per room (urban) 1.5 In.p L1.7/, 2.5 0.9 Ic 1.1 /o,qPercet cf -ccupied units without piped water 15 63 51 52 7a 38 7WAccess to electricity (as % of total Population) 91, /c 985 .. 96 Tn,rPercent of x'ural population connected to electricity .

CONSUMPTIONL-go -ece-rsper 1000 popu-lation 81 161 276 215 /d 218Passeniger cars per 1000 population 5 /f 35 25 70 190Electric poe~r consumption (kwh p.c.) 530 l ,110 /d 525 /d 1,502 /5 2,188Newsprint consumption p.c. keg per year 1.5 1.3 3.1 5.8 5.3

Notes: Figures refer either to the latest periods or to account of environmtental temperature, body weighta, anedthe latest years. Latest periods refer in principle to distribution by age aned sex of national populations.the years 1956-60 or 1966-70; the lat.eet years in prln- 16 Prot.ein standards (requirements) for al.l countries as estab-ciple to 1960 and 1970. Onily significantly different lisbed by IEDA Economie Research Service provide for a mi-nimumperiods or years are foot-noted separately. allowance of 60 grama ef total protein per day, aned 20 grams of11 The Per Capita aNP estimates for years other than 1960 animal and pulse protein, of which 10 grams should be animalis at market prices, calculated by the same conversion protein. These standards are somewhat lower than those of 75technique as the 1972 Wbrld Rank Atlas. grams of iotal, protein and 23 grams of animal protein ae an12 Average number of daughters per woman or reproductive average for the world, proposed by PA') i-n the Third World Foodage. Survey.5 Population growth rat"e are fbr the decadies enading in 17 Some atudies have suggested that crude death rates of children1960 and 1970. ages 1 throughi 4 ma be used as a first approximation Index of/L Ratio of under 15 and 65 and over age brackets to malnutrition.those in labor force bracket of agee 15 through 64. 18 Percentage enrolled of oor~responding pop.lation of school ageFAO reference standards represent physiological re- as defined for each oountry.qo,irement. for no rmal activity eand health, takIng

1171 cc-.n 'I. Pojo: let.i-c ee 2f10,X) L ll,Ir f poo,at ad.r V; n-d ever 6'; i, i,ta ,,her foce ' 1';- ,t:~~~If,i; /~I oM LI,. i 1t)4'6 /k c 08-619; 5I 1%l,-W71; In.l6-1P0.~~~~~ ~ ~~~~1; /,icl,ccc 1'y-rc~e: L t 1 reler-1 . ,11 Ios 5 11r,an and rua I r Perreunt,ag. .1' dwell7 gn -lt.hI 1I ,'I -r' s ,'luding In, i 11;n.r.r

R ucicceohr 11~. 397n

911525 LIVId ~~~~~~~~~ANNlEX 1

ECONOMIC DFVBl,0FX1LNT DATA ~~~Page 2 of 3 Pagea

(Amounts in millions f05 olr,

Aetoal Ph-oje-stei ~~~~~~~~1960- 1065 - 1970 - 1973- - 9 170 17

1960 19s 190 !D 1975 L9L8 1965 0c 195 17 90 AW 17

romestic Prndu-YearAverae at ,197- 5969 25rices & Exconange Rates veage Anual Growth Rates As Percent of GUY

*;ec.us fonestic Product 7209.8 95532 12U33.? ~~lUllluJl[t5 237. 6.1 Li8 . 7.5 100.5 100.2 100.8

fat ran Terns of Trade C') .353 - 19.24 - 26.24 -107.1 -132.5 -176.6 . . . . - .5 - .2 - .8

Gros.s Dome,stic Iscome, 7037.5 M.T. 8 1=Y58 15779. 2 17MU. 6 2IM.7 6.2 5.8 7.2h 7.5 IM-o t=7o =.0

Imnort mJcl. Y~t) 1I52.8 16624. 2711.8 35(66.9 4336.3, 5959.9 7.8 10.3 9.9 9.24 16.2 22.6 28.1

EsYc-DrI.s import cpantotty) Z76Z.2 -i1461:24 2055.9 -2790.0 -3l567.4 -5717.9 13.7 7.1 11.0 11.1 -10.9 -17.1 -22.3

Resource G;ap 373.6 .0: M9 T673.9 'fl.u IZ7o .I. . . 3 37'5 -378

ConsunjtsiOn Expenditures 528.3.1 6623.3 9015h.5 110524.3 12723.6 15833.7 L.6 6.4 7.2 7.5 75.0 75.0 76.7

Inve-stment 11(irl. stocks) 2128.0 3101.3 36248.3 4401.5 5215.5 6603.0 7.8 3.3 7.24 8.5 30.2 30.24 31.2

GoetcSavings 17524.24 2903.0 2992.54 3726.5 5347.1 5361.03 10.6 0.6 7.8 7.5 24.9 25.9 25.3

Natiiosat Sav-ings 18245.1 2952.24 3353.2 5321.3 5105.3 6468.3 9.9 2.6 8.8 8.4 26.2 27.9 30.5

MiNFCE2IMISE ~TRALSE Aninual Data at Cu,rent Prices As Percent of Total

ImportsCapital Goods 236.0 254.0 736.6 958.7 1175.2 1598.6 16.r, 25.0 9.8 11.0 28.5 21.L 19.9

Fuels aLnd intermediate gocds 2469.0 79. 180. 30.45383.2 6819,7 11.3 220 14.9 163 56.8 63.2 66.1

Conss'ption Goods 122.0 235.1 531.5 667.6 803.24 10-73.2 13.9 17.8 8.7 10.0 15.7 15.5 15.0

TPotal Mereb. Imports, (cif) 827.0 1287.9 31728.7 482-1.7 73395.o 03179.5 9. 20 13.0 15.5 I1.o IW 755o

ExportsPrimary Products 142.3 152.7 206.1 264.0 313,0 398.0 0.6 6.1 8.7 8.5 26,2 12.3 8.5j

Manufactured Goode Li 27 932§.3 E168 . 21)7.C H2875 .0 24339.0 17.6 9.24 I4.5 124. 8 73.8 87.7 91.6

Total Bicech. Exports(fob )~66.0 1092.0 175.0 255 1.0 C 3 19, 577. 15.0 9.0 13.8 15.5 !ro =I.O Tor. c

Tou,rism and Border Tradle 124.0 81.0 275.0 513.0 667.0 988.0 53.0 28.0 19.24 15.0

Merchandise 'h-ado. ixilesAvrag,e 1967-69 - 100

Export Price StIsx 75.6 93.1 112.1 12B,0 137.2 152.1 5.3 3.8 5.1 3.5

Import Price Index 76.24 95.7 113.2 135.7 1155.2 161.2 5.1 3.5 5.1 3.5

Terms~ of Trade Index 96.5 97.3 99.1 924.3 95.3 924.3 0.2 0.3 -1.0 0.0

Exports Volume indiex 50.0 77.0 95.0 130.4 156.6 219.7 9.8 5.3 9.6 11.0

VALUFE ADLIFD BY SECTOR AnulDt 16 - rQ~ and Exchange Rates Average Annual Growth, Sates As Percent or Total

Agriculturo 1967.24 2063.9 2536.8 2767.1 295-2.1 3226.0 1.0 3.i, 3.8 3.1 27.8 20.3 15.1

7,d,,stry ana MiUning 2035.9 3518.6 0575.5 614+2.7 7366.0 9618.5 11.0 6.9? 9.1 9.2 28.7 39.5 45.0

S,-rvce -M&.24 32-56.2 dj 1243.&5 3263 52L.6 .25~26.7 5.1 4.2 7.3 75 4 3.6 6,0.3 39.9

Total 7069.7 9538.9 120-33.0 124886.1 17202.7 21371.1 6,0 5.0 7.5 7.5 ioc6.o -100.0 100.0

P5UBLIC FSILAICE I/ (emilion of currant Dinars) As Percent of GDP

-eerIGovernneFtTt

Current Receipts 24911 8130 15367 .. . . 10,5 12,. . . 15.6 8.1

Curn xendIture~s 3960 7724 12996 .. . . 15.3 lo.8 . .. 12.6 7.5

Bkidgetery Savings 3752 -32 1+3'71 .. . . -18,0 31.0 .. . 3.0 0.8

O)ther Public SeCtor 3387 ., 10217 ,. . . , . . , 10.7 5.8

P'ublic Sector Investment 1159 2680 2651 .. . . 15.5 03 . .. 3.6 1.5

US $ miltion

CURREN4T ESItJ!7PESIh ETAL Actual Prelis. Eset. ?roj. DETAIL Oil At end 196

7-69&9d ER

As It Total Current oxee. L 971l 1917 2 la97-3 PUBLIC SECTOR Plan % of Total

Education I . . NVESTMENT PRCOBARM 2/ (19 68-71) - 168- 71>'

Other Social Services . 7.5 5.5 7'.7 ., Scial Sectors

Agriculture . . Agricultu-e

Crher i-conomie Services 17.0 7.7 7,1- 5.54 . Industry and Mining

Dlefense 55.5 60,0 55.6 57.7 ,. Power

A(-iinni-,ratiin snd Other 27.6 25.8 31.8 39.2 ,. ransport snd cooea.nications

Total Current Exedtue A Th I . Oher

____________________________________________________________________ Total Expendit~ures

sELECTED INPiCATOCS ~~~~~~ ~~~1960- 1969- 1970.- lI% I"?3 0155V

Crclodfrets '-y,--r averenEed da,ta) 1965 19710 ~575 137?8

A, !,i-TO~ 5-'77 ~ 7Z 24. - [(7 Puti-- S-ctoDr Savings

Impor. EInti tit,y 1.3 2.2 It. 1.5 "rogese aidconepr

'lu- cxi Gone,"-tir , Selge R.: e, .46 .04 .27 .25 F~cowreg Proc~ect Aid

N,ergiej. l Na t oestl IS-eng.c R.ite .45 .11 .32 .31 Total Pinano~inE

Loot in0~~~~~~~~~~Ttoal Labor Force!, ---____ Value Addo;d Per Worker (1967 -69 Prices & Exe. Bataes)

Cl=itfi fec 20:3'KM: in mill ion., % if otal t -7.7 Tn .. ons Pecn of Average 190- ~701*60 Lf,2710 It-j ur--.,rae I960 3970 1 960) 1970 Growth Sate

Agr:c.fl.tar-- -. 5~~.69 3, 93 56 57 -, 256 C 290 29.0 20.0 1.7

lod-stry t.I,6 1.89 18 23 2.6 212 565 25.0 32.0 2

er'ti7 1cts 1.36 1.60 16 22 2.8 (3 90 ~697 46u.0 8o :

~Ither (untxployed) .83 .87 lo .8 -2.0

Total FNE 8717 TM m 73 175 IZ72 1030.00 100.0 7

- out ppiecai - nil or negligible-

--otavailable -- less thar, half the,sMal lest unit Sciwt

1 / The s.ax expenditure system. ini in the procese of change as a result of toe 19'I Cue stitution.l Surape, Middle East and North Africa Region

an.endr,ents. Meaningful proflecttiors ~ere therefore not po-ssibte. October 16, 1973

21 Due to decsetralizatt~on tne public sector onl5 plays a resicdual, role ton carr-ying cut investasent.

9it-ciast self managI-ng enterprises are the prime agents for lerplerenting investment plans.

Pig=rsr 3 pagee

Avn. kwAesl

Actual Eela, ______Prjce uth Rat.I~~~~~i Ž Z~~~~~~~~~~ gil ~~~~~~~~ 197T ggu 17 -au2 1973-7E

:09en407 RttI2.Ci IF PA07852TS

FoptIe (on-l. N.70) 168.1 2131. 21.69 2810 32M 377 1.351 5029 5791:,Irntflts fIne). 9375) 2020~~~_%~ .21IQ5. 1220. 2222. Jle J. hMs7 £6L -22

p91.2177fl,a;csx-8) 1A ~~~~~ ~~~~~-271 -731. -910 -51 1.6917 -1082 -1256 -16 171T4 -.2001

.vst(ne) 79 - 90 -109 -126 -150 -172 .0 -186.6 -205. 3 -221.56 -2 32 .5 -242.2 7.1I?rr.nt Tnyeatr,ent Intone ~ ~ ~~- - - 1 - 2 - 3 5, 7 - 10.2 _ 16.8a - 25.4 - 36.5 - 46.9 01.0.4.:bCfS' Rentotanent ~~~~ ~~~122 206 w.o 652 780 904. 8 104 9.6 1217.5 1412. 3 16538. 3 1900,4 16.0

:j:-n-~t Tasniarn tt) (J~. ~....2 7r 7....2. 78 ...2& ,..Ua ...L4Ital .. r Cure Acont-ail t-rLC.62_ _ _ _A-=t -1170 _; 7 _;L

X-I's IetLensnt2 10 20 ; 50 i5 100 130 150 15so 24.5

1 barcsrw 171.7 205.7 21C..s 274.3 P-4. 4 38. 3 92 7. 1 09. 434. 7 443,6 4120 70-Re ,ncants ~~~~~~~~~~-161,. ,445,, Al 1. . .--LI,, _il s -' I ac

2260A .-.a33 -aSIL2 -.c.811.l -

)11

&Oisbarnernntn ~~~~~~~~~10. .o33T 75.0 014.... 139.5 179.6 L722.4 89. 4 903.4 89.4 41. 3 -14. 7

t1s)ursus.ntte ~~~~~~ ~~~212.3 313.3 160.6 722.0 714.6 495. 2 721.-9 792.0 018.6 929.0 980. 7 14.4-22 6 18 zk8h ~ .3l 6 j 27j aSLS . A0 .... a250 Z-7176 .L1

RinborseSenlil ~ ~ TE~ '551t4 26971 332.0 495.5 -8.0 042.3 9. 5. 6. 0.~~~11 RN 5111.1_~~~~~~~~~~~~~~~~~~~~~~~~. 183.1Acs 1letnae

1.8 to] 7t.csn4cti4rce c.e.O. ~~~-138.5 -72.1. 99.0 -162.0 - 21 i&& 1969 1970 1971 19 72F,o9 nNet Resrvs-- -7 90 0 -526.0 3--' I6 12 71

ATID ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~NbDbtOt Ib-rsed 11048. 1190.0 1216.4 1304.6 1508.2

flif5o}tnl Grants6 Grant-Ike - -Ttretnlblin Debt 519.9 53. 3 72.1 52.4 23.0

Reanet P9. ?Ri. Debt 196. 2 159.4 169.4 130.9 2015.0592.17 ...an 1/ Tota- PublIc 0o0t Ser..ce 205.1 213.2 241.5 043.3 2048.2L

[970 66.0 30.4 90.0 l10.4 100o Othr Debt Se-vice (net) 82. v1s.? 242.5 468.4 551,0 -TtlDetSric.rt 330.0 398.9 484.4 601.7 0839.

.mlCX05011t1 ~~~~ ~~~~~~~2. 3 77.0 29.7 131. 351itippllern ~~~~ ~~~~ ~~~~2.6 6.1 31.3 53 -1: NOiSe Debt Service 1 2.8 8.9 8.1 9.2 6.

Pitat-ial et)i t-tion IS 1. 11.7 - rnl Debt Service 16.6 0 5. 0 16.2 191 9.Sc IS - ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~~- - -TlDflrect llrrest. tan. 2/16.9 15.0 16.2 19.5 19.0a

RiOlta lenin,, 1. -n-- - ............~~~~~~~~.S .6 Cennertible Debt Derv.....tbatOr 21..). . 23.64.2 2.6 2 219.4)3 22.2T7tat efl3w86MLA n 11.6.1 126.0 171.7 t?2. T vcevTren Pbi ib

le.tcal Debt IRtetanuilg onDn 1 932 lt eSprier Yee 0fl9. 5.3 4.6 6.0 4.3 3.9__X_________ Pernuln inrt, as Prir Yea 076D 17.6 17.9 14,2 10.8 17.3

IDA - 'MD02 Sebt flit. 6 2n.b-.nd 194.4 218.7 243.7 276.9 316.5Liter 6iltilatnral ~~~~~~~~~~~~6.7 5.2 %0 S blIc De-bt 06D 16.9 18.0 20,0 20.4 20.0

lctrlnts 6S6.5 2L.1 " a 8 blic Debt Sercl- 6.6 9.5 9.5 14.6 00.5

-1,LittflI In.ctitsttnrs ~~~~339.3 9,6 DAI Deb t 16t. & Disb-ced - -15.-do 19.~~~~~~~~~~~~~g2 3 5. fl% Ptblic Debt 06 - - -

coAjnC Belts n.e .1 ~~~~~~~~~~~~ 0.1 c NEU.Pbl Debt See-Ins - -

Innh, MUITDoo 1682251

5.11 IlT DEbt

in eaDal nnt&e1hlss -c tall the Etrpe, Middle Eout,and Cnth7Atnina RegenPi lnlsvdIctoa smallest taiit-dey

7/ DC:t ent1n In cevstbl urny fernnrtbcferoog en.--ge anre

ANNEX IIPage 1

THE STATUS OF BANK GROUP OPERATIONS IN YUGOSLAVIA

A. STATEMENT OF BANK LOANS (as at September 30, 1973)

US$ millionAmount (lesscancellations)

Number Year Borrower Purpose Bank Undisbursed

Ten Loans fully disbursed 280.2

531 1968 Yugoslav Investment Bank Railways 50.0 6.6554 1968 Yugoslav Investment Bank Industry 16.0 .1608 1969 Social. Fed. Republic of

Yugoslavia (SFRY) Roads 30.0 3.0654 1970 Yugoslav Investment Bank Industry 18.5 .2657 1970 Yugoslav Investment Bank Telecommuni- 40.0 24.1

cations678 1970 SFRY Roads 40.0 20.8751 1971 SFRY Roads 35.0 25.4752 1971 Hotel "Bernardin", Piran Tourism 10.0 9.3777 1971 SFRY Multi-purpose 45.0 44.0

Water782 1971 "Babin Kuk" Hotelsko

Turisticki Centar,Dubrovnik Tourism 20.0 18.9

836 1972 Eleven Electric PowerEnterprises in Yugoslavia Power 75.0 75.0

894* 1973 Stopanska Banka, Skopje AgriculturalIndustries 31.0 31.0

916* 1973 NAFTAGAS Pipeline 59.4 59.4Total 750.1 317.8

of which has been repaid 85.4

Total now outstanding 664.7Amount sold 6.2

of which: Amount repaid 5.8 0.4

Total now held by Bank** 664.3

Total undisbursed 317.8

* Not yet effective.** Prior to exchange rate adjustments.

ANNEX IIPage 2

B. STATEMENT OF IFC INVESTMENTS (as at September 30, 1973)

Type of Amount in US$ millionYear Obligor Business Loan Equity Total

1970 International Investment Corpora- Investment - 2.0 2.0tion for Yugoslavia Corporation

1970 Zavodi Crvena Zastava Fiat S.P.A. Automotive 5.0 8.0 13.0Industry

1971 Tovarna Automobilov in Motorjev AutomotiveMaribor (TAM)/Klockner-Humboldt Industry 7.5 2.3 9.8Deutz A.G. (KHD)

1972 FAP-FAMOS Belgrade/Daimler Automotive 13.1 2.9 16.0Benz A.G. Industry

1972 Sava/Semperit Tires 4.0 1.6 5.6

1973 Belisce/Bell Pulp and 13.7 - 13.7Paper

Total Gross Cormitments 43.3 16.8 60.1less cancellations, terminationsrepayment and sales 2.2 2.4 4.6

Total Commitments held by IFC 41.1 14.4 55.5

Total Undisbursed 22.3 6.0 28.3= ~~~=cm

ANNEX IIPage 3

C. PROJECTS IN EXECUTION -

Loan 395 Railway Modernization Program: US$70.0 million Loan of December 11,1964.

The loan was fully disbursed on October 31, 1972, after the ClosingDate had been postponed from December 31, 1969. However, completion of theproject has been delayed to 1975, due to financial planning and technicaldifficulties. After 1966 the Yugoslav Railways suffered a continuous deter-ioration of their financial position and liquidity for a number of relatedreasons. Project cost estimates increased nearly threefold between 1963 and1971 because of inflation, devaluation of the dinar, revaluation of someEuropean currencies and as a consequence of additional work following moredetailed feasibility studies. Payments for railway freight services wereheld back by the lack of liquidity in the whole economy. The five RailwayTransport Enterprises which, under the Yugoslav system, are expected to oper-ate on a commercial basis, were restricted by Government regulations in theirability to respond to changed market conditions. Furthermore, the responsibilityof the Federal Government to meet railway deficits has been transferred to theRepublican Governments, which only now are in a position to assume it.

In order to be able to make proposals for dealing not only with thedifficulties with the Bank project, but also with the difficulties facing theYugoslav railways as a whole, it was agreed with the Government that the Bankwould undertake a thorough review of the railways' problems. Following thisreview, which was carried out with the assistance of a consulting team, theBank discussed its findings with the Federal and Republic Governments and theRailways. The response of the Governments and the Railways was very favorableand they agreed to take concerted action to improve the railways' situation.In view of this, the Bank agreed to consider making a further loan in fiscalyear 1973 or 1974 to assist completion of the 1964 modernization program,provided that certain conditions could be met. These are the clarification ofgovernment responsibility for the railways and an overall plan of action bothfor the Yugoslav railways as a whole and for each Railway Enterprise (includingclear marketing and related operational and financial objectives), a revisedtariff policy, investment and disinvestment proposals, and proposals fordealing with labor redundancy problems and for improvement in management.The Governments and the railways have taken and are taking measures to meetthese conditions, and a mission visited Yugoslavia in November/December 1972to assist in the preparation of new action plans. Revised investment andfinancing plans submitted recently required substantial re-appraisal of theproject which was done in May/June 1973. Although the final size of theproposed project is just now being determined, as Republics clarify the avail-ability of local resources, the Bank's financial assistance would be concen-trated on the completion of the 1964 modernization program of main lines.

1/ These notes are designed to inform the Executive Directors regarding theprogress of projects in execution, and in particular to report any prob-lems which are being encountered, and the action being taken to remedythem. They should be read in this sense, and with the understanding thatthey do not purport to present a balanced evaluation of strengths andweaknesses in.project execution.

ANNEX IIPage 4

Any further delay in carrying out a minimal modernization programcould further jeopardize the competitive position of the railways in relationto road traffic and would extend the period in which the economy would notbenefit fully from the large investments in the Modernization Program madewith Bank assistance since 1964.

Loan 531 Belgrade-Bar Railway: US$50.0 million Loan of March 22, 1968;Closing Date: December 31, 1975.

Execution of this project was delayed by more than one year due togeological difficulties and inefficiency of the contractor responsible forthe civil engineering work at the Kos Tunnel. The contract has now been placedwith another more efficient contractor already working for the project. Thedelays have made it necessary to reschedule track-laying which is now expectedto be completed in 1975- The line is expected to become operative at the endof 1975. The closing date has been postponed from December 31, 1973, toDecember 31, 1975.

As a result of inflation and cost overruns, the total project costhas increased from $225.5 million to $292.0 million. This has resulted in afinancing gap of $37.0 million. The authorities are presently consideringarrangements for closing this gap.

Loan 554 Industrial Projects - 1968: US$16.8 million Loan of August 15, 1968;Closing Date: October 31,1973.

Seven of the nine sub-projects under the loan have been completed,but two sub-projects have been delayed. Sub-project Nis (Electronic Industries)is behind schedule up to two and a half years, due primarily to delays in pro-curement, but is now expected to be completed shortly. Two production ex-pansion schemes under sub-project Sevojno (Copper and Brass Mill) were revisedwith Bank approval and are expected to be completed in December 1973 with sixmonths' delay and about two years delay, respectively. The Closing Date waspostponed on April 11, 1973 from March 31 to October 31, 1973. Disbursementof the loan is in line with the revised sub-project completion schedules.

Loan 608 Third Highway: US$30.0 million Loan of June 5, 1969;Closing Date: December 31, 1973.

Construction works under the loan have been substantially completed,except for the construction of the Karlovac bypass and the access road inZagreb, which are expected to require several additional months. The ClosingDate of the Loan was accordingly postponed from December 31, 1972 to December31, 1973. In view of increases in costs, the disbursement percentage has beenreduced from the original 42 percent to 27 percent, in order to continue dis-bursements until the completion of these works.

ANNEX IIPage 5

Loan 654 Industrial Projects - 1970: US$18.5 million Loan of January 1970;Closing Date: December 31, 1973.

All three sub-projects under the loan are making satisfactory pro-gress after experiencing delays of up to 18 months due to slow deliveries oflocal and imported goods. The Closing Date was postponed on June 28, 1973from June 30 to December 31, 1973 to allow payments of 10 percent retentionmoney under already concluded contracts of Crvena Zastava and Sisak.

Loan 657 Telecommunications: US$40.0 million Loan of February 20, 1970;Closing Date: June 30, 1975.

Since the last project review delays in civil works have occurredwhich will delay completion of the project until late 1975. With the exceptionof the earth satellite station, only preliminary works have been completed. Acost overrun for already placed orders amounting to US$5.1 million iq expecteddue to currency revaluations. Expansion of the telecommunications network hasnot kept pace with the demand resulting in a waiting list of 1.5 million appli-cations.

Loan 678 Fourth Highway: US$40.0 million Loan of May 28, 1970;Closing Date: December 31, 1973.

After an initial delay of about one year in starting work on theSarajevo-Zenica sections because of difficulties in acquiring the right-of-way,work on all sections is proceeding satisfactorily. The completion of the proj-ect, however, is likely to be delayed substantially beyond the present ClosingDate: the extent of this delay will be determined in the Fall of 1973.

Inflation and the delays in starting construction caused an increaseover the appraisal cost estimate of about 10 percent. The Federal Governmentsubmitted a revised cost estimate of construction work in January 1973 and onthe basis of this estimate the disbursement percentage has been revised from43 to 40 percent, effective March 1, 1973. Disbursement is proceeding in linewith the revised projection.

Loan 751 Fifth Highway: US$35.0 million Loan of June 18, 1971;Closing Date: September 1, 1976.

After a delay of about eight months in fulfilling the conditions foreffectiveness of the loan, construction work is now making satisfactory prog-ress on all sections. A 10 percent increase in the appraisal cost estimate isexpected, and the disbursement percentage would be revised when more accuraterevised cost estimates are available. Disbursement under the Loan is aboutone year behind the appraisal estimate.

ANNEX IIPage 6

Loan 752 Bernardin Tourism: US$10.0 million of Loan of June 18. 1971;Closing Date: June 30, 1976.

After the loss of imore than one year owing to delays in making the

loan effective and in appointing consultants, the implementation of the proj-ect experienced a further delay of one and a half months. Preliminary costestimates indicate that the project, if it were to be implemented as original-

ly envisaged (2,500 beds) would require approximately US$34 million instead ofUS$24 million. This increase is ma'nly due to rapid inflation but also to

realignment in exchange rates. As no additional financing appears to be forth-

coming, the project might have to be reduced to some 1,500 to 2,000 beds by

eliminating the most expensive structures with the lowest returns. The start

of construction might be delayed as the financing of primary infrastructure(roads, electricity and telephone) is not secured and funds are lacking tocomplete works at the new site of the shipyard which is presently occupyingthe project site.

Loan 777 Ibar Multipurpose Wiater: US$45.0 million Loan of June 30. 1971;Closing Date: December 31, 1976.

The start of project work was delayed for one year. However, the

responsible agency, the Ibar-Lepenac Enterprise, is now well established and

good progress is being made in constructing the project. It should be pos-sible to complete most of the project by the end of 1976 (i.e., one year later

than originally planned).

Loan 782 Babin Kuk Tourism: US$20.0 million Loan of July 21, 1971;Closing Date: July 31, 1976.

Earlier delays in the project, caused by difficulties in mak.ing the

Loan Agreement effective and appointing consultants, were further compoundedduring FY 1973 by the refusal of the local lendirng institution to make dis-bursements to Babin Kuk for consultants' work, enginleering surveys and pro-ect administration. Most of these difficulties have been resolved, but toisadditional delay in a period of extremely high inflation in the Yugosl-av

building industry has further increased the cost of the project. Updated.detailed cost estimates are to be prepared and the scope of the project re-evaluated in October 1973. The next supervision mission is planned forOctober 1973.

Loan 836 Power Transmission: US$75.0 million Loan of June 23) 1972;Closing Date: June 30, 1977.

This loan was declared effective on December 29, 1972. After some

delays in preparing tender documents9 bidding procedures are now under way.

A supervision mission visited the project in October,

ANNEX IIIPage 1

YUGOSLAVIA: Kikinda Iron Foundry Project

Loan and Project Summary

Borrower: Livnica Zeljeza i Tempera - Kikinda (Kikinda Iron

Foundry).

Guarantor: Socialist Federal Republic of Yugoslavia.

Amount: US$14.5 million, equivalent, in various currencies.

Terms: Amortization in 14 years, including a 4-year grace period,

through semi-annual instalments beginning Apr,l 15, 1978

and ending November 15, 1987. Interest rate, 7-1/4 percent;

guarantee fee accruing to the Socialist Autonomous Province

of Vojvodina, 1-3/4 percent.

ProjectDescription: The project comprises the expansion of the annual produc-

tion capacity of the Kikinda Iron Foundry from 19,900 tons

to about 39,000 tons of iron castings, from 4,000 to about

6,400 tons of pipe fittings, and from 350 units to about

460 units of machine tools, and the modernization of the

Kikinda plants. The project includes:

(a) Expansion and modernization of the malleable foundry,

including two hot blast cupolas, four electric induc-

tion furnaces, two flaskless molding lines, one auto-

matic molding line, two annealing furnaces and sup-

porting facilities;

(b) Expansion of the gray and nodular foundry, with four

electric furnaces, one automatic molding line, one

annealing furnace, and core-making facilities, oneheat treatment plant, one sand preparation plant and

supporting facilities;

(c) Expansion and modernization of the fitting finishing

shop, including thirteen automatic machines, six

lathes, one new galvanizing plant, one additional

packing unit and supporting facilities;

(d) Expansion and modernization of the machine tool plant

including relocation of existing machines, replace-

ment of old machines, addition of numerically-controlled

machines and a climatized mounting room;

ANNEX IIIPage 2

(e) A new streamlined storage and materials handlingsystem;

(f) Expansion and modernization of the existing facil-ities for the distribution of electric power, gas,compressed air and water ancl the installation ofone inew gas-heated steam boiler;

(g) Construction of a railroad connection to thepublic railroad system; and

(h) Installation of equipment for dust and fume extraction.

Estimated Cost:(US$ Million)

Local Foefign Total Percent

Equipment and Spares /1 3,1 11e2 14.3 37.5Duty and Taxes 3.0 - 3.0 7.8Erection 1.4 1.4 3.6Civil Construction 2.3 - 2.3 6.2

9,8 T11,2 21.0 55.1

Contingencies: Physical 1.0 1.3 2.3 6.0Price 1.9 2.0 3.9 10.1

Total Fixed Assets 12.7 14.5 27.2 71.2

Pre-operating & Start-up 08 0,2 1.0 2.7Engineering - 0.3 0.3 0.9Incremenital Working Capital 5.9 0.7 6.6 17.4

Total Project Cost 19,4 15.7 35.1 92.2

Interest DuringConstruction /2 3eO 3.0 7.8

Total Financing Required 19.4 `8.7 38,1 100l 0

/1 c.i.:% cost ant plant/2 Negligible

ANNEX IIIPage 3

Financing: (including interest during construction)Sources US$ (Million) Percent of Total Financ-

ing Required

IBRD 14.5 38.1

Internal CashGeneration ofBorrower 23.6 61.9

38.1 100.0

EstimatedDisbursements: Calendar Year Amount (US$ million)

1974 6.571975 5.541976 1.721977 0.67

TOTAL 14.50

Procurement: Equipment packages costing over US$100,000, equivalent,would be procured through international competitivebidding, whereas those costing less than US$100,000,equivalent, would be bought through a procedure underwhich the borrower may award contracts after havingreceived at least four comparable bids from qualifiedsuppliers in at least three eligible countries. Forpurposes of bid comparison, preference would be givento Yugoslav components of foreign bids to the extentof 15 percent of the ex-factory price of such compo-nents or the actual customs duty on equivalent im-ported components, whichever is less.

Consultant: The Swiss consulting firm Hayek Engineering A.G.,Zurich, has been employed to provide assistance ininternational procurement.

Rate of Return: The most probable economic and financial rates ofreturn in real terms are estimated at about 18 per-cent and 19 percent, respectively.

Estimated ProjectCompletion Date: February 28, 1977.

Appraisal Report: Report No. 218a-YUDate October 19. 1973Industrial Projects Department

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