Document of

The World Bank f CIL,FOR OFFICIAL USE ONLY

Report No. 3013-RO

ROMANIA

STAFF APPRAISAL REPORT

ON

FOURTH POWER PROJECT

November 21, 1980

Projects DepartmentEurope, Middle East and North AfricaRegional Office

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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ROMANIA

CURRENCY EQUIVALENTS

Currency Unit = leu, lei (plural)lei 181/ = US$1.00leu 1 = US$0.0556lei 1,000,000 = US$55,556US$1 = lei valuta 4.47

WEIGHTS AND MEASURES

m = meter = 3.28 feetkm = kilometer = 0.62 milem3 = cubic meter = 1.31 cubic yardskWh = kilowatt hour = 3,414 British thermal unitsGWh = Gigawatt hour = 1 million kWhTWh = Terawatt hour = 1 thousand GWhkW = kilowatt = 1 thousand wattsMW = Megawatt = 1 thousand kWGW = Gigawatt = 1 thousand MW

kVA = Kilovolt-ampere = 1 thousand volt-ampereMVA = Megavolt-ampere = 1 thousand kilovolt-amperekV = kilovolt = 1 thousand voltst = metric ton (tonne) = 1.1 US tons = 2,204.6 pounds = 1,000 kgMt = Mega metric ton = 1 million tonsh = hour

toe = ton oil equivalentkcal = kilocalorie = 3.968 BTUs (British Thermal Units)Gcal = Gigacalorie = 106 kcalgcc = gram of conventional coal = 7.0 kcal

GLOSSARY OF ABBREVIATIONS

ISPE - Institutul de Studii si Proiectari Energetice (Institute of Power Studiesand Designs)

ISPH - Institutul de Studii si Proiectari Hidroelectrice (Institute of Hydro-electric Studies and Designs)

MChI - Ministry of Chemical IndustryMEE - Ministry of Electrical EnergyMFCM - Ministry of Forestry Economy and Construction MaterialsMM - Ministry of Mines, Petroleum and GeologyMMI - Ministry of Metallurgical IndustryRE - ROMELECTRO (Foreign Trade Procurement Enterprise of MEE)CIPEET - Centrala Industriala de Producere a Energiei Electrice si Termice (Indus-

trial Central for the Production of Electrical Energy and Heat)CIRE - Centrala Industriala de Retele Electrice (Industrial Central of Power

Network Enterprises)DEN - Dispecerul Energetic National (National Electrical Energy Dispatch System)EU - ENERGO-UTILAJ (Enterprise for Construction and Erection Tool Supply of the

MEE)FYP - Five-Year PlanIB - Investment Bank (the Borrower)ICEMENERG - Electrical Energy Research InstituteIRE - Interprindere de Retele Electrice (Transmission and Distribution Enterprise)SCP - State Committee of PricesSPC - State Planning CommitteeTCH - Trustul de Constructi Hidroenergetice (Trust for the Construction of

Hydropower)

GOVERNMENT OF ROMANIAFiscal Year

January 1 to December 31

1/ Appraisal estimates have been made at the 18 lei/$ exchange rate. Duringnegotiations, the Romanian delegation was not able to confirm that theexchange rate would be changed from 18 to 15 lei/$ on January 1, 1981.Subsequently, the Bank was officially informed that such change will bemade and the Romanian equalization fund abolished as of January 1, 1981.The estimate of foreign cost in equivalent $ is not affected by the newrate. Other effects from the change are minor. They would reduce thetotal cost estimate in equivalent lei marginally by about 4.5%, have asomewhat favorable effect on cash generation and improve the return oninvestment by about 0.4%.

FOR OFFICIAL USE ONLY

ROMANIA

STAFF APPRAISAL REPORT ON

FOURTH POWER PROJECT

MINISTRY OF ELECTRICAL ENERGY (MEE)

TABLE OF CONTENTS

Page No.

I. THE ENERGY SECTOR ....................................... 1

A. Sector Organization .......... ... .......... 1. B. Energy Resources ................................... 2C. Energy Supply and Use ...... ........................ * 3D. Energy Policy and Strategy ..... .............. 4E. Sector Issues ....... ................. 5

1T. THE POWER AND HEAT SUBSECTOR ..... ....................... 6

A. Subsector History Overview ..... .............. 6 B. Subsector Organization ..... ............... 7C. Subsector Activities ........... 8......... 8D. Achievements After 1960 ..... ............... 9

(a) Overview ....................................... 9(b) Hydropower and Generation-Mix .... .............. 10(c) Transmission System Growth ...... .............. 11(d) International Interconnections .... ............. 11(e) Electric Energy Savings ..... .................. 1(f) Access to Service and Rural Electrification .... 11(g) Current Status of Subsector .... ................ 12

E. Subsector Policy and Strategy ..... .................. 12F. Planning of Power and Heat Supply ........ .. ......... 14G. Tariff Levels and Structure ........... .. ............ 14H. Subsector Performance and Issues ......... .. ......... 16I. Role of the Bank in Subsector .......... .. ........... 17

III. THE BORROWER AND PROJECT ENTITIES ....................... 18

A. Investment Bank (IB) - The Borrower .... ............. 18B. Project Entities .................................... 19

(a) Ministry of Electrical Energy - (MEE) .... ..... 19(b) National Electrical Energy Dispatch System

- (DEN) ...................................... 19(c) Industrial Central for the Production of ..

Electrical Energy and Heat - (CIPEET) ........ 20

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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TABLE OF CONTENTS (Continued) Page No.

(d) Industrial Central of Power NetworkEnterprises - (CIRE) .20

(e) Trust for the Construction of Hydro PowerProjects (TCH) .21

(f) Staff Training Facilities .. 21

IV. THE DEMAND FOR ELECTRICITY AND HEAT AND MEANS OF MEETING IT. 22

A. Planning and Forecasting .22B. Load Growth Forecast .22C. Power and Electrical Energy Balances .22D. Heat Supply .23

V. THE PROJECT .23

A. Objectives . 23B. The 1980-1985 Subsector Program .24C. Project Description .24D. Engineering and Status of Project Elements ............. 25E . Cost Estimates .25

(a) Program (1980-1985) .25(b) Project (mid-1980 - mid-1983) .26

F. Financing .27G. Implementation .28

(a) Responsibility for Program/Project Implementation . 28(b) Procurement .28

H. Disbursements .29I. Environmental Aspects ............................. 30J. Project Risks and Uncertainties .31

VI. FINANCIAL ASPECTS .. 32

A. Past Financial Performance .32B. Future Financial Performance .32C. Project Financing Plan .33D. Accounts and Audit .35E. Insurance .35

VII. PROJECT JUSTIFICATION .35

A General .35B. Least Cost Solution .38C. Return on Investment Program .38

VIII. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATIONS . .39

FIGURE

1.1 Forecast of Net Primary Energy Production and Consumption

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TABLE OF CONTENTS (Continued)

CHARTS

1.1 Organization of Ministry of Mines, Petroleum and Geology2.1 Ministry of Electrical Energy (MEE) Organization Chart3.1 Ministry of Electrical Energy, National Energy Dispatch (DEN)

Organization Chart3.2 Industrial Central For Production of Electric Power and

Heat (CIPEET) Organization Chart3.3 Industrial Central for Transmission and Distribution of

Power (CIRE) Organization Chart

ANNEXES

2.1 Functions of MEE's Organizational Units2.2 Reduction of MEE System Losses, 1965-19792.3 Development of Access to Electricity Service

4.1 Generating Capacity, Energy Production, Peak Load and LoadFactor, 1976-1985

4.2 Sector Generation and Sales, 1972-19854.3 MEE Interconnected System, Planned Generation Reserve at

Maximum Annual Peak4.4 MEE Interconnected System, Planned Generation Reserve at

Mid-Year Peak Load4.5 MEE's Interconnected System - Net Capacity Additions - 1977-1985

5.1 Construction Program of MEE Centrals (CIPEET, CIRE) and DEN5.2 Project Cost Estimate for July 1, 1980 - June 30, 1983 Time

Slice of CIPEET, CIRE and DEN Investments5.3 List of Goods to be Financed from Loan Proceeds5.4 Technical and Economic Indicators for the Major Power Plants to

be Completed 1980-19855.5 Estimated Disbursement Schedule

6 List of Annexes and Attachments on Financial Aspects

7.1 Comparison of 1978 and 1980 Projections of Added InstalledCapacity, Production, Investment

7.2 Return on Investment7.3 Construction Expenditures - Summary

MAP IBRD 10830 Ri

ROMANIA

STAFF APPRAISAL REPORT ON

FOURTH POWER PROJECT

MINISTRY OF ELECTRICAL ENERGY (MEE)

I. THE ENERGY SECTOR 1/

A. Sector Organization

1.01 The State Planning Committee (SPC) coordinates energy planning andexpansion in Romania, carried out by the following Ministries with regard tothe respective subsector concerned:

Ministry of: Area of Responsibility of Subsector

Mines, Petroleum and Geology Extraction of oil, natural gas,(Ministry of Mines - MM) anthracite, coking coal, coal, lignite,

bituminous and carboniferous shale.

Electrical Energy (MEE) Electrical energy and heat.

Chemical Industry (MChI) Petroleum refining and petrochemicals.

Metallurgical Industry (MMI) Coke and coke-oven gases, coal-tar.

Forestry Economy and Construction Wood.Materials (MFCM)

Operating efficiencies in the power subsector are some of the highest anywherenotwithstanding multi-responsibility for sector planning, due to an integratedapproach to the use of energy at national and Romanian regional levels (para1.03) and the legal obligation to comply with the plans.

1.02 The MM (Chart l.l)--with the Industrial Centrals for coal and othermining activities directly under the Minister, and with seven directorates foroil and gas, geology, technical development/planning, finance, organization/training, investment and international economic cooperation--has responsibilityfor production of fuels and their processing and transport. The fuels aredelivered to the end users at set quotas and fixed prices. For natural gas

1/ Further information on the sector is given in Report No. 1601-RO ofMarch 31, 1978 entitled "Romania - The Industrialization of an AgrarianEconomy under Socialist Planning" - mainly in Volume II, pages 267 to288, Chapter XIV - "Consumption and Production of Energy Resources".

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the MM ensures compliance of individual consumers with assigned quotas(paras 2.18-2.20). The MEE (para 2.03) is responsible for planning of systemexpansion and the design, construction and operation of generating plant andtransmission and distribution systems. It receives coal and gas for itsproduction of heat and electricity from the MM and fuel oil from the MChI.The MMI supp;ies waste heat in form of industrial gases for electricity andheat production by the MEE thermal plants. The MChI processes all crude oil,associated natural gas liquids and part of natural gas supply into petroleumproducts and chemicals for sale in domestic and foreign markets. Similarlythe MMI and MFCM are in charge of production and marketing of the productsunder their responsibility.

1.03 The 1973 oil crisis had led to establishing the "Permanent Commissionfor the Coordination, Guidance and Control of Fuel, Electricity and HeatConsumption" late in 1973. The work, under its coordination, has producedthe strategy and policy discussed in paras 1.09-1.11. The Commission is alsoinstrumental in expediting the ongoing revision of the 1981-1985 Five YearPlan (FYP) for the sector, precipitated by Romania's recent loss of oil suppliesfrom Iran and Iraq.

B. Energy Resources

1.04 The primary energy sources of Romania consist of crude oil, naturalgas (including that associated with oil extraction), coal, anthracite, cokingcoal, lignite, brown coal, bituminous and carboniferous shale, and hydropower.Wood for fuel is still available in the countryside. There are importanthydropower resources, and there is a geothermal potential, probably of lowtemperature, that could possibly be developed for space heating.

1.05 Regarding thermal energy, Romania was one of the world's early(since 1857), large-scale producers and exporters of petroleum. Before WorldWar II it ranked among the five largest producer countries. But in recenttimes consumption caught up with supply and it has had to import crude oilfrom OPEC sources to maintain its traditional and profitable export of refinedproducts. While no figures are published by the Government, it is likely thatpresent known producible petroleum reserves amount to around 100 to 200 milliontons (Mt) 1/, and gas reserves could be of the order of 500,000 million m. 2/Coking coal in exploitable quantities is limited 3/; with 3,600 to 4,700kcal/kg it has about half the heat value of imported hard coal. To feed mainlyits steel industry demand, Romania has a long term joint investment with acoal supplier in the eastern USA. The main, economically exploitable lignite 4/

1/ About 700 to 1,400 million barrels; production of oil in 1979 was around14 million tons (Mt).

32/ 1979 production of gas was around 2,800 million m.

3/ Total hard coal production in 1979 was around 6 Mt.

4/ 1979 production of lignite was around 15 Mt.

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deposits are in the south-western part of Romania. The lignite has only abouta quarter of the specific heat content of imported hard coal, has a high ashcontent and is uneconomical to transport over some distance; most of it is,therefore, used in large power plants to produce electricity and, in accelerat-ing degree, heat (para 4.05). Carboniferous shales are found in the Anina-Oravitsa region together with coal deposits; ash content is very high (up to85%) and specific heat content only about 1/4 of imported hard coal. Whilethe mineable coal reserves could be considerably less and no figures forbituminous shales (assumed to be in the order of 200 Mt) are available, theofficial estimates of the coal reserves are as follows:

-----------Million Tons---------Proven Probable Possible

Anthracite 14.0 1.3 8.2

Coking Coal 18.7 325.6 52.7

Bituminous Coal 39.0 711.3 85.2

Lignite and Brown Coal 360.4 386.2 68.1

Source: MM.

1.06 The hydropower resources of Romania are estimated to be 12,300 MW,capable of generating 37,000 GWh per annum from some 630 sites. 1/ Only 75%of this is economically feasible for development at the present time, theremaining 25% being described as technically feasible . Also, Romania's fiveplants on the Danube, being developed jointly with Yugoslavia and Bulgaria,should produce 2,400 MW and 12,300 GWh per annum. About 2/3 of the economicallyfeasible hydropower capacity has been developed. The government expects thefull hydropotential to be tapped by the end of the 1990s.

C. Energy Supply and Use

1.07 Romania became a net importer of energy in 1972/73 and of oil andoil products in about 1976. Currently, the country still meets more than 80%of its energy needs from domestic oil and gas resources. Natural gas has beenand is the most important source of primary energy; it accounted for 44% oftotal consumption in 1975, oil for 33%, coke and coal for about 19% andhydroelectricity for only about 3%. Domestic production of crude oil isslowly decreasing despite intensive secondary and tertiary recovery efforts.

1/ 1979 production of hydroelectric energy was 11,239 GWh or 17.3% of totalelectric energy generated.

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The increase in the supply of other domestic sources of primary energy--coal,lignite, bituminous shales and hydropower, consequently, continues to be givenpriority. Low productivity and labor unrest in the coal mining sector have inthe past affected low-grade coal supply and consequently the power sectorperformance. To fill the energy demand/supply gap, Romania will have toimport substantial amounts of its commercial energy needs by 1985, mostly inthe form of crude oil and increasingly of high grade coal. The use of wood asa household fuel is still widespread; local peat deposits are not regarded aseconomically exploitable. Although the discovery of oil and gas off-shorein the Black Sea has been announced, the size of the resource is not yetknown. Figure 1.1 shows projections to 1990 of the net primary energy produc-tion, indicating the strong reduction in hydrocarbons and the gap betweenrequirements and domestic resources.

1.08 Despite Romania's successful energy conservation program, energydemand in Romania increased rapidly from 6.8 million tons of oil equivalent(Mtoe) in 1950 to about 61 Mtoe in 1977, as a result of rapid industrializationand may reach 78 Mtoe in 1980. Efforts since 1974 had reduced energy consump-tion as reflected in the energy/GDP ratio. By 1980, Romania was planning tosave 8 Mtoe in the industrial sector and 5 Mtoe through increased waste heatrecovery. Further savings are resulting from the measures introduced in July1979. However, to cover the additional petroleum supply gap resulting fromthe loss of contracts with Iran, Romania concluded a limited supply contractwith the USSR in 1979. The oil supply situation has worsened further due tothe Iran-Iraq crisis.

D. Energy Policy and Strategy

1.09 Since the mid 1960-s, the Government's most important energy policyobjectives continue to be:

(a) to increase output of primary energy to cover the requirements to amaximum from internal resources, primarily coal and hydropower;

(b) to intensify efforts in conservation of hydrocarbon resources,including likely through retrofitting of industrial boilers to burncoal in addition to those for power and heat of MEE included in theFYP; and direct their use to production of petrochemicals;

(c) to increase efficiency in the utilization of plant capacityand also in the consumption of users; and

(d) to expand oil and gas exploration, particularly in offshoreareas.

The Government's strategy continues to be to make fullest use of indigenousresources and, more recently--with Canadian help--to develop nuclear power. Afirst 600 MW unit of Canadian supply is planned to be commissioned about 1985.Canada is expected to provide financing in the order of Can $1.0 billion toassist the first phase of Romania's nuclear program. The total program isexpected to provide about 2,840 MW by the end of the 1980s.

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1.10 In the power subsector, because of the integrally-planned approachto expand and operate the economy, Romania has reached an exceptionally highlevel of integrated multipurpose use of primary thermal energy for the produc-tion of electricity and heat which is mostly centrally produced and rationallydistributed for consumption; this seems to be the reason for the very highefficiency in the countrys use of such energy. The recent worldwide concernfor energy conservation is now leading other parts of the world to increasinglyadopt an integrated multi-purpose energy use (including of normally "wasted"heat) which is planned to be further expanded in Romania under its 1981-1985FYP. Some 35% of central heating is derived from co-generating plants in thecountry and it has exported this technology to other countries, as Romaniamanufactures co-generating units up to 150 MW.

1.11 The centrally-planned system has allowed Romania to take drastic andvery early steps (in comparison with most other countries) to conserve energyon a large scale. The 1979 measures, strongly enforced by quotas, have led toimmediate reduction of energy use. Heating and lighting of factories andoffices were lowered to minimum levels; use of private and official passengercars was drastically curtailed and the cost of petrol increased; heat thatwould usually be wasted in conventional condensing power plants is recoveredand channelled to provide process heat, hot water and space heating. For thelatter, new users are found in large scale greenhouses, when a power plant hasto be located away from industry and population near low-grade coal deposits.To reduce hydrocarbon use in existing, older vintage electricity and heatgenerating stations, the Government plans now to provide for further fuel oilsavings by adding new coal based co-generation stations.

E. Sector Issues

1.12 In addition to growing energy imports, the major issue is the needfor a speedy improvement in specific energy consumption in order to reduce therelatively high per capita consumption of energy which has resulted from thestructure of industry and its high share in the Romanian economy. In the1981-1985 FYP period, the Government intends to reduce per capita consumptionbut the reduction will be slow because: (i) the technology used in the Romanianindustry is relatively energy intensive as, until recently, domestic energysources were relatively abundant and imported technology was also energyintensive ; and (ii) much plant and equipment uses less efficient processesthan the more advanced technology in other countries. Also, until recently,physical production targets were the over-riding concern of the plan under thegross production concept; it had been generally more important to produce thegoods than to produce them efficiently. Beginning in 1979, Romania introduceda net production concept into the Plan which emphasizes value added. This,and Romania energy conservation programs, are expected to have a significantimpact on lowering specific energy consumption as capital stock is replacedover time. The industrial projects which the Bank is helping to finance areintroducing processes to Romania that are more energy efficient. The aboveissues are being addressed in the 1981-1985 Draft FYP. In this connection itshould be noted that the level of energy consumption in Romania is a result of

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high gas, oil, coal and lignite consumption, and not of per capita consumptionof electric power which is fully in line with comparable countries.

1.13 The bulk of the economy's additional energy requirements to 1990will have to Je provided increasingly by electrical energy based on lignite,hydropower, nuclear and shale, in that order. A lignite production increaseof the targeted size can only come, however, from a rapid growth of open-castmining, and the whole planned program is geared to a very tight deliveryschedule for new equipment. The development of new mines must also beintegrated with the construction of new power stations that will use thelignite. The open-cast mining system employs very large electrically-poweredmobile bucket-wheel excavators largely manufactured in Romania in cooperationwith a West German firm. Delay in commissioning such new excavators wouldresult in a large loss of production of lignite, equivalent to large amountsof oil or hard coal, which would presumably have to be made up in imports.Thus any substantial delays in commissioning of new mining machinery, or ofnew power stations in which the lignite is to be burned, will have economicrepercussions. Past setbacks in lignite production have led to increased oiland gas consumption and caused the highest Government levels to intervene.To confirm that adequate action is planned for the needed lignite/coal supplyfor electrical energy production, the Romanian authorities have provided anacceptable statement on the measures being taken to expand coal production andcoal production forecasts.

II. THE POWER AND HEAT SUBSECTOR I/

A. Subsector History Overview

2.01 Electrification in Romania began in 1882, providing in Bucharestone of the first public electric lighting systems in the world. But electri-fication grew slowly, mainly in urban centers, and in 1938 the installedcapacity was only about 500 MW for a population of 19.8 million, e.g., about25 watts per inhabitant. In 1979, it was 15,000 MW and 740 watts, respectively.After World War II, with the rapid development of the economy, electrifica-tion of the countryside was emphasized. In 1949, the subsector planning anddesign institutes and the specialized enterprises for manufacture, construction,

1/ In Romania, electricity production is strongly linked, through "co-generation", to the production of heat (steam and hot water). Both arecommercially supplied, and in part distributed, by MEE's Centrals andenterprises to the users. The Romanian energy "subsector", therefore,includes electricity and heat.

installation and operations accelerated their activities. The subsector'scurrent high level of capability and performance (paras 2.07-2.14) makes it oneof the most advanced in the less developed countries. The rapid evolution washelped particularly in the postwar period by a national industry built up toproduce equipment and materials for the fast growing needs of the subsector.

2.02 Since 1950 the FYPs have stressed the rational utilization of allindigenous resources for subsector development, including oil and gas in theearlier years. The activities concentrated on:

(i) development of complex hydro-projects on river cascades;

(ii) construction and use of large thermal generating unitscombined into very large power plants, and locating nearbythe new, large consumers of heat (district heating) andindustrial "platforms" needing heat and process steam; and

(iii) establishing a single interconnected electric power system,connected to the national systems of neighboring countries;the former helped the accelerated electrification of villagesand urban areas without electricity service.

B. Subsector Organization

2.03 The activities of MEE are controlled and coordinated by theMinister and his three Deputies, reporting to the MEE Executive Bureau whichis directed by the MEE Managing Council (Chart 2.1). The Bureau, consistingof the Minister, Deputies and Directors of subordinated departments and unitsof MEE, manages the subsector. The MEE organization follows the nationalpattern set for the Ministries for industrial production. The Minister andthe heads of MEE's organizational units have executive authority. MEE has itsown statutes and regulations on tariffs (para 2.18), conditions of supply andinstructions on the application of the regulations. The organizational unitsof the MEE, including its two Industrial Centrals (para 2.05) and, in turn,their enterprises, are subject to legislation 1/ which regulates and controlsall economic units in the Romanian socialist system. Legislation, implementedthrough Ministry of Finance instructions in the financial area, covers suchmatters as depreciation rates, classification of accounts and distribution andpayment of benefits and the preparation of financial reports for the Centrals.

1/ Law No. 11/71 - covers organization and management of the Centrals andEnterprises. Decree No. 76/73 - covers organization and management ofthe Ministries and other State Bodies.

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Each enterprise submits monthly operational results and quarterly balancesheets to the respective Central which supervises its activities and co-ordinates finances.

C. Subsector Activities

2.04 MEE is responsible for the overall performance of the subsector;coordinates its activities (para 2.05) through other central organs withthe rest of the economy; translates national economic objectives and poli-cies for electrical energy and heat into specific physical, financial, andefficiency targets for its organizational units; and approves their respectivespecific investments. Through its research, design and engineering institutes;construction trusts 1/; enterprises; and other units MEE is also responsiblefor the design and execution of its projects to provide for the future publicdemand for electrical energy and heat. It controls its foreign tradeoperations (import and export) through its foreign trade enterprise -ROMELECTRO - in collaboration with the Ministry of Foreign Trade and Inter-national Cooperation.

2.05 MEE and its dependencies employ a total force of about 130,000 (upfrom 106,000 in 1970; an increase of 2.6% p.a.). MEE's two centrals, fourinstitutes, five construction trusts, three enterprises and several otherunits have so far very capably performed their assigned activities. This theycan be expected to continue to do. Their activities under active direction ofstaff of MEE, provide for the subsector (and also for other subsectors):research, planning, design, engineering, construction, commissioning, opera-tion, maintenance, repairs 2/ and training for electrical energy and heatsupply. The responsibilities and activities of the central departments(Directorates) of MEE, headed by their Directors, are stated in Chart 2.1.Annex 2.1 provides a summary of the main activities of MEE's main subordinatedunits.

1/ The term "trust" is applied only to construction and agricultural enter-prises in Romania.

2/ The repair activities are widely spread throughout the different organiza-tional levels. This is a particular feature of the economy where theministries for industrial production own special machine building andspare parts manufacturing enterprises, which supply the sizeable cen-tralized repair enterprises. Within MEE, capital repairs are carried outby such enterprises and similar ones owned by the two Centrals andoperating enterprises.

D. Achievements After 1960

(a) Overview

2.06 During 1961-1965, MEE started the construction of important hydro-power projects, including the multi-purpose Iron-Gates I project on theDanube, jointly with Yugoslavia. With a total of about 2,100 MW (50% Romanian)Iron-Gates I produces run-of-river hydropower and improves river navigation bya system of locks. MEE also expanded thermal power plant rapidly. Mostexpansion was accomplished with goods and services increasingly produced inthe country. This substantial effort required channeling about 12 to 15%annually of all industrial investment into the subsector.

2.07 Total demand for electrical energy, which has been 75% industrial,increased annually at 15.3% during 1965-1970, 9.4% - 1970-1975, and 7.1% in1975-1979. During 1965-1978 MEE carried out a large construction program tomeet this growth in demand. The following shows the remarkable achievementsof the subsector:

TransmissionAnnual Gross Annual Lines

Installed Size of Peak Annual Capacity/ 110 kV toCapacity Largest Unit Load Production Load Factor 400 kV

Year GW MW GW TWh / % 103 km /2

1965 3.26 150 n.a. 17.5 61/n.a. 6.33(17.7) (n.a.) (14.9) (11.15)

1970 7.35 315 5.64 35.1 55/71 10.74(9.5) (8.9) (9.1) (10.2)

1975 11.58 315 8.64 54.2 53/72 17.45(6.9) (3.5) (6.0) (8.3)

1978 13.62 330 9.59 64.3 54/77 22.12(10.8) (3.2) (1.0) n.a.

1979 15.09 330 9.90 64.9 49/75 n.a.

Note: Numbers in brackets show interannual growth in % p.a.

/1 Includes: self-producers, station use, losses in transmission anddistribution and exports of 596, 2,413, 3,007, 1,777 and 1,959 GWhfor years shown; excludes imports of 265, 28, 502, 344 and 1,241GWh for the same years. 3

/2 Includes 0.38, 1.29, 2.34, 3.33 and n.a. x 10 km of 400 kV for yearsshown.

Source: Mission estimates based on MEE data.

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(b) Hydropower and Generation-Mix

2.08 The share of hydropower generation, has grown dramatically since1960 as demonstrated by the share of installed capacity (11.8% in 1960 and21.2% in 19 9) and net electric energy supplied (5.7% in 1960 and 19.5% in1979). The major hydropower installations in operation during 1979 were onthe rivers: Danube - 1,050 MW (Romanian side of Iron-Gates I); Lotru - 510 MW;Somes - 265 MW; Arges - 220 MW; and Bistrita - 210 MW (Bicaz plant)--with thelargest units of about 170/175 MW at Lotru/Iron-Gates. Riul Mare-Retezat,with 369 MW, is under construction with Bank financing.

2.09 The remainder of the electricity generation is thermal. The composi-tion of the net supply to the system has developed as shown below, showing asubstantial increase of hydro and oil-based energy production, a substantialreduction of the share of natural gas and a level participation of lignitesince 1970.

1965 1970 1975 1976 1977 1978 1979

Total Productionin TWh /1 17.22 35.08 53.73 58.27 59.86 64.25 64.86

Production based on

Hydro - % 5.9 7.9 16.2 13.9 15.6 16.5 17.3Natural Gas - % 69.7 58.5 49.6 52.9 46.1 41.4 n.a.Oil and Diesel - % 5.2 3.0 4.2 4.3 10.0 15.8 n.a.Lignite - % 6.8 15.8 16.3 15.7 15.0 14.2 n.a.Other Coal - % 11.6 12.1 11.5 10.6 10.8 9.5 n.a.Other - % 0.8 2.7 2.2 2.6 2.5 2.6 n.a.

Total - % 100.0 100.0 100.0 100.0 100.0 100.0 100.0of which

Self-Producers - % 14.4 8.2 4.3 5.3 5.5 5.3 5.2Total ThermalCapacity - GW 2.80 6.15 8.95 9.62 10.65 11.04 11.90

/1 Gross production - including self-producers.

Source: Mission estimate, based on MEE data.

Among the largest and most important thermal power stations are the lignitefired: Turceni - 2.64 GW (under construction with Bank financing), Rovinari -1.72 GW, Craiova - 0.98 GW, and Ludus - 0.80 GW; the oil and/or natural gasfired: Braila - 1.62 GW, and Borzesti - 0.65 GW; the carboniferous-shale fired:Anina - 0.99 GW (one 330 MW unit each to be commissioned annually 1981-1983).The largest unit sizes had been standardized and are in use at 220 MW and,more recently, at 330 MW.

(c) Transmission System Growth

2.10 While until the 1960s the predominant transmission line voltage was110 kV, the rapid growth of the system has required the doubling of the voltagelevel each decade: to 220 kV during the 1960s and 400 kV, since 1970. Combinedwith building up a substantial and meshed transmission network (Map 10830 RI),this has greatly increased the reliability of electricity supply and decreasedthe losses in transmission and distribution (para 2.12). The security ofelectricity supply is, appropriately, one of the main concerns of the Romanianpower system planners and of the centrally directed national load dispatchsystem which reports directly to the Minister. A modern national load dispatchsystem (supplied by Siemens-West Germany) has recently been successfullycommissioned to increase the reliability of operation.

(d) International Interconnections

2.11 An important achievement, benefitting in growing degree the regional(eastern European) economies, are the interconnections of the MEE power systemwith the national systems of Romania's neighbors: with Bulgaria at 220 kV,Yugoslavia at 110 kV 1/, Hungary at 400 kV (initially operating at 220 kVsince 1972) and Czechoslovakia at 400 kV 2/, with the latter through USSRterritory. (A 750-kV line also connects the Bulgarian with the USSR powersystem across Romanian territory.)

(e) Electric Energy Savings

2.12 A major achievement of the subsector has been in energy conservationthrough increased operating efficiency, resulting in some of the lowest energylosses in electricity production (Annex 2.2) when compared to other Europeancountries of similar size and location of load centers in relation to maingenerating areas.

(f) Access to Service and Rural Electrification

2.13 Romania has achieved a remarkable degree of electrification andaccess to electricity service for its population in a relatively short time.Urban areas are electrified 100% and villages about 93%. Residential annualconsumption per capita has more than doubled since 1970 (at 10.5% p.a.); inthe same period the disparity in rural/urban consumption has also beendrastically reduced (Annex 2.3). However, the residential per capita con-sumption is still one of the lowest in the eastern European region. During1977 it was about 222 kWh/yr when it ranged from 629 (Bulgaria) to 62 (Turkey)

1/ As a regional intertie, at the Iron-Gates I hydropower station.

2/ This 1965 connection tied the MEE system to the 400 kV Mukhacevo substa-tion which in turn serves as tie for the systems of Hungary, Czechoslovakiaand USSR.

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with 555 for Yugoslavia, 492 for Czechoslovakia, 447 for Greece, 375 forHungary, and 246 for Poland. In line with the general population ratio, abouthalf of the residential customers are rural. In 1978, only 5 counties (judets)out of a total of 40 (including the Bucharest municipality) did not reach 88%of village electrification indicating a very low regional dis-. arity in accessto electricity service. The major beneficiaries of the electrificationefforts by the subsector are industry and the fast growing Bank supportedagroindustry.

(g) Current Status of Subsector

2.14 In 1979, Romania's interconnected generating capacity was 15,087 MW;3,192 MW in hydro and 11,089 MW in thermal plants belonging to MEE. Thebalance, 806 MW, were chiefly captive thermal plants operated by isolatedautoproducers. System peak was 9,900 MW and total gross generation andpurchases 66,085 GWh. With 95% of the country's installed capacity inter-connected, MEE plants generated 61,529 GWh and autoproducers 3,345 GWh.Imports and exports amounted to 1,241 and 1,959 GWh, respectively. MEE salesin 1979 were 51,884 GWh, an increase of only 2.25% over 1978 compared to anaverage annual increase of 10.9% for 1970-76, 4.4% for 1976/77 and 6.1% for1977/78. Based on national planning targets which take into account energyconservation and efficiency improvement efforts, average annual load growth upto 1985 was expected in 1978 to be 6.1% and is now expected to be around5.o%.

E. Subsector Policy and Strategy

2.15 Since 1950 the Government's electrification planning has had twomain objectives:

(a) to increase domestic primary energy production (since1975 primarily of coal and hydropower) for meeting therapidly growing industrial requirements for electricalenergy, through a national electrification program; and

(b) to develop an energy infrastructure in terms of personnel,research, study and design institutes and enterprisesto exploit national energy resources.

MEE has succeeded in implementing this basic policy in the framework ofnational energy policy (para 1.09). During the 1981-1985 FYP MEE aimsspecifically, through its investment program (para 5.02), to

(i) Widen its primary energy resource base by:

- increasing the use of hydropower on nationalrivers and on the Danube;

- undertaking the construction of small and mini hydro-power plants on the swift flowing mountain rivers;

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- increasing the use of solid fuels (lignite,carboniferous and bituminous shale, brown coal)not well suited for other uses; and

- constructing nuclear power plants.

(ii) Continue the vigorous energy and cost savings program by:

- increasing the recapture and sale of waste heat andby expanding co-generation facilities;

- further reduction of transmission and distributionlosses;

- concerted reduction of the use of oil and gas inelectrical energy and heat production;

- increasing thermal efficiencies of plant producing andtransporting heat for supply to industry and municipalsystems;

- reducing the consumption of energy intensive mate-rials in construction and equipment for subsectorexpansion using most modern technologies;

- optimally locating new plant in relation to load andprimary energy resource; and

- reducing energy use in power station auxiliaries.

(iii) Improve the subsector's institutions by:

- better organization and more effective operation of thenational interconnected system; and

- transfer of technology.

(iv) Prepare for future application of non-conventional energysources by:

- systematic study of the economic application ofsolar, wind, biomass and ocean energy.

The above policy and strategy is very comprehensive and will strain MEE'shuman and material resources.

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F. Planning of Power and Heat Supply

2.16 The expansion planning for electricity and heat supply is carriedout under th_ overall responsibility of the Planning and Development Departmentof the MEE. It assigns, contracts, and directs the more detailed studies andwork, undertaken on its behalf, by the specialized research, planning, designand engineering institutes (Central Research Institute, ICEMENERG, ISPE,ISPH). This planning activity is efficiently carried out and has producedvery good results, considering the material and equipment supply constraintsexisting in the country at times. The specifics of the current planning andits methodology are not available. However, MEE has used mathematical model-ling techniques for more than 10 years, including computer programs, which ithas developed and which are geared to arrive at a development program based onusing the least mateLial resources combined with least financial costs. Theapproach complies with the national energy policy objectives (para 1.09) whichemphasizes the use of domestically produced lignite, and also places limits onthe import of oil and gas, and provides for the development of nuclear poweron a long term basis.

2.17 The planning for the subsector is carefully coordinated withthe country's central plan preparation 1/ for the FYPs, the mid-term FYPupdate and the annual budget setting exercise. Taking into account the veryhigh incidence of industrial load, MEE has established and follows appropriatelyconservative criteria for planning system reserves, reliability, security andperformance. MEE participates in the elaboration of five-year and longer termplans, in the drafting of the FYP directives and the establishment of theAnnual Plan. Within the bounds of the November 1979 approved general directivesMEE is now finalizing, for early 1981 approval, the plans for the subsectorfor the 1981-1985 FYP. Because of the long lead time required for most powerprojects about 90% of the subsector investment program (para 5.02), tobe implemented by the two Centrals, has been approved already under therevised FYP (1976-1980) and the plan for 1981.

G. Tariff Levels and Structure

2.18 Tariffs for electricity and heat are subject to regulation by theState Committee of Prices (SCP); they are approved by the Council of Ministersand are uniform-throughout the country. The principal functions of prices inRomania are stated in Law No. 19 on Prices and Tariffs of 1971, updatedJanuary 1, 1977. Prices are only one of the instruments for planning and

1/ An extensive treatment on this subject is provided in Chapter III ofReport No. 1601-RO referred to in the footnote on page 1.

implementing development objectives 1/. They are established at fixed levelsor narrow ranges. Resources for development are allocated to a large extenton the basis of physical indicators and quotas and--under the "New EconomicMeasures"--increasingly, by indicators of value. The Government maintains asstable a level of prices as possible; each FYP contains a target for themaximum permissible increase, the fulfillment of which is the responsibilityof the Council of Ministers, the SCP, and the People's Councils. Since 1977,electricity and heat tariffs have been set to reflect not more than the costof supply and a margin for specified purposes. These low level electricityand heat prices allow the agricultural, industrial and manufacturing enter-prises to increase their profits which are then taxed at the end of thechain. For this reason, the subsector's tariffs and financial performance(paras 6.01-6.04) cannot be viewed in isolation from the rest of the economy.However, these tariffs are being reviewed presently in connection with thefinalization of the 1981-1985 FYP. During negotiations, the Romanian delega-tion stated that the modifications envisaged are likely to result in substantialtariff increases (possibly 40% for power and 55% for heat).

2.19 In the revenue earning enterprises the disposition of their surpluses,under the "New Economic Measures", is in the following order of paying:

(i) to the respective Industrial Central, up to 10% of annual surplus,to reimburse investment funds previously received;

(ii) to the enterprise's own economic development fund;

(iii) to the productive working fund (working capital fund);

(iv) to the fund for workers' housing and other social investment;

(v) to the participation of working people in profits;

(vi) to the social and cultural fund; and

(vii) to the State Budget.

Electricity costs are tightly controlled and have been virtually unchangedsince 1974 in terms of cost per unit sold. Savings, through increasedefficiency, have been a major factor in holding down cost increases.

2.20 While tariffs produce only a small margin over operating andadministration costs, they provide a reasonable portion of future investmentneeds (para 6.03). The tariff structure for electricity includes time-of-dayrates, differential peak and off-peak demand and energy charges and other

1/ See Chapter IV of Report No. 1601-RO, referred to in the footnote onpage 1, for an extensive discussion of the pricing system.

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elements of marginal cost pricing conducive to economically efficient alloca-tion of resources. To control electricity consumption, penalties amounting upto 200% of the normal bill are imposed on those who exceed their plannedelectricity allocation. It has not been possible to establisb that thetariff structure reflects the marginal cost of supply 1!. in che absence of acomprehensive study of tariffs and of actual and planned system componentcosts in Romania for the power and heat subsector. However, the elements ofthe tariffs, the quota system and the penalties imposed for excessive usecontribute to the efficient use of electrical energy.

H. Subsector Performance and Issues

2.21 Clearly, the electrical energy-heat subsector expansion has beenhandled by the country's planners and authorities astutely. In contrast to aremarkable growth performance in the past in all areas of the subsector, thepresent trends point to a slowing down of growth, in part a sign of maturing ofthe economy and also of coming saturation of industrial demand for electricity,as ought to be expected. Remarkable are the very high annual load factors(for a country with cold winters and a continental climate) and the consequentlyhigher than normal capacity reserves needed; nevertheless, an acceptable levelfor the use of the capacity is achieved.

2.22 The country's subsector planners seem to have anticipated thecurrent world-wide energy problems before they developed and initiated theconcerted early national action in a direction now increasingly taken by othernational economies, that is:

(a) conservation by increasing efficiency and reducing losses;

(b) optimal use of economies of scale by appropriate sizing ofgenerating units for the right primary energy type and ofsystem interconnections, taking advantage of load diversityand raising the load factor;

(c) coordination of generation and industrial plant expansion andlocation; and

(d) extensive use of co-generation and use of waste heat fromindustrial processes (e.g. coking gas) and using more abun-dant primary energy sources (lignite).

1/ On July 31, 1979 the Government instituted a new, progressive tariffstructure, but only for domestic consumers as part of its energy con-servation. The impact is still being evaluated.

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The very rapid growth of the Romanian power system over the last decade hasstrained the staff of the enterprises which appears to be capable and experi-enced and competently exercises delegated authority and responsibility. Therehave been consistent productivity gains also in the past decade, reflectingthe general growth of economies of scale in the sector and increasing effi-ciency. The design institutes and the construction trusts of the MEE havegained substantial experience as shown by their proven performance record onprojects in Romania and many other countries.

2.23 The main subsector issues are that major technical modernizationwill be needed in the longer term in power plant control and automation.Other technological advances could cover such areas as updating the design oflignite and shale fired thermal generation, distribution and transmissionequipment, study of the availability and use oi geothermal resources (if notfor power, then for heat), and design and production of equipment for efficientlow cost small hydro plants. Because of the advance in the capability of thesubsector, foreign consultin'.g knowhow is not used in subsector planning,design, engineering, procurement, implementation of expansion, testing,commissioning and operation. H1owever, in view of the FYP program to updateRomanian technology, MEE, in cou-junction with national research and engineeringinstitutions, is developing a plan for learning about the most modern methodsused in other countries in such anJ other sector activities. These plans arenot sufficiently advanced to be considered for Bank financing. The amount offoreign exchange needed for the techn-logy transfer for the subsector is notsignificant; less than US$200,000 had been indicated during negotiations.

I. Role of the Bank in Subsector

2.24 The Bank has made three loans for power in Romania: (i) the TurceniThermal Power Project - Stage I, with 1,320 MW and associated transmission(Loan 1028-RO of US$60 million on July 5, 1974); (ii) the Riul Mare-RetezatHydropower Project, with 355 MW at Retezat and 14 MW at downstream Clopotivaand associated transmission system (Loan 1242-RO of US$50 million on July 13,1976); and (iii) the Turceni Stage II doubling the capacity (Loan 1652-RO ofUS$70 million on January 11, 1979). None of the above projects has beencompleted, although Loan 1028-RO was closed on June 30, 1979.

2.25 The status of project execution for the above three projects is asfollows: Turceni Stage I: Unit No. 1 was started up in June 1978 and commis-sioned in December, unit No. 2 in the first quatter of 1980, and units No. 3and 4 are scheduled for commissioning by 1981. The estimated 15-month delayis due to skilled labor shortage and late deli-veries of equipment. RiulMare-Retezat: The Project, about 37% complete, is about 12 months behindschedule mainly due to the chronic lack of tunneling manpower. Works at therock quarry and the earth dam core have been delayed also by heavy rains andsevere winters. Some geologic problems had led to substantial water infiltra-tions in the pressure gallery. A tunnel boring machine was ordered December1978; late delivery delayed the full operation to mid-1980. Combined effortof this machine with conventional tunneling should help avoid further delays.The bulk of the Bank financed procurement has been completed and disbursements

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are relatively close to appraisal estimates. Turceni Stage II: Designengineering and construction of the second stage is proceeding immediatelyfollowing the first stage. Contracts have been awarded for about 97% of thegoods being financed from the loan. The project is expected to be delayed byabout 15 mon_hts on account of delays in the first stage.

2.26 The Bank's assistance to the subsector is relatively modest 1/as lending is to a relatively sophisticated sector:

(a) it is one more means to meet the general objective of providingconvertible currency transfer to Romania;

(b) it has played and will continue to play a role in introducingthe sector's associated supply industries to internationalcompetition and International Competitive Bidding (ICB);

(c) it has helped and should continue to help transfer up-to-datetechnology; and

(d) it has made and, in connection with the preparation of furtherprojects, should continue to make a useful contribution to planningby inducing Romania to modernize its system expansion planning bythe use of modern computer programs.

2.27 MEE has expressed an interest in expanding its analytical andplanning capability and has requested access to the latest WASP 2/ (III)computer program from the IAEA 3/ in Vienna. The Bank plans to continue itsdialogue with MEE on improving computerized subsector expansion planning aspart of the preparation of the next power project for possible Bank financing.

III. THE BORROWER AND PROJECT ENTITIES

A. Investment Bank (IB) - The Borrower

3.01 The Borrower for the proposed loan would be the Investment Bank(IB). The loan would be guaranteed by the Republic of Romania. The IB is

1/ Bank financing, including the proposed loan, represents approximately6% of Project requirements during the period July 1, 1980-June 30, 1983(see para 6.05).

2/ Wien Automatic System Planning.

3/ International Atomic Energy Authority.

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the specialized agency, under the Ministry of Finance, for dealing withinvestment projects in all sectors of the economy except agriculture and foodprocessing. IB has staff for dealing with technical and economic matters atits headquarters and its branch offices in all districts of the country. TheIB's involvement in investment projects begins in the preparation phase of aproject; its staff appraises all major investment projects technically andfinancially according to Romanian norms. All investment funds for an approvedproject are channeled through the IB. Projects up to 30 million lei areapproved by the Centrals; projects between 30 and 70 million lei by theMEE; projects above 70 million lei by the State Council. IB authorizesall payments for the execution of a project in accordance with the approvedplan. It is IB's obligation to ensure that a project is executed according tothe financial and technical data and indicators included in the final technicaland economic study (Project de Executie) as approved. IB's inspectors supervisethe projects to ensure progress according to the approved schedule.

B. Project Entities

(a) Ministry of Electrical Energy - (MEE)

3.02 MEE's direct dependency (DEN) 1/, its two Centrals, CIPEET and CIRE,and its Trust for the Construction of Hydropower Projects (TCH) would be theproject entities for the proposed project (para 5.03). Only some of theenterprises of CIPEET and CIRE would be the final beneficiaries. MEE andits Centrals are expected to be able to administer the loan proceeds andrelated procurement competently, based on the Bank's experience with itsprevious three loans. The loan documents with the Borrower provide for anundertaking to enable the Bank to carry on a direct dialogue at the respectivetechnical and financial staff levels of MEE, the above project entities, theultimate beneficiary enterprises, and the other units participating in theproposed project.

(b) National Electrical Energy Dispatch System - (DEN 1/)

3.03 DEN--reporting directly to the Minister of the MEE and organizedhierarchically (Chart 3.1) by levels of responsibility and authority--effi-ciently and effectively controls and supervises ("on-line" since about mid-1979)the national interconnected system of CIRE, its connections to neighboringcountry systems, and the operation and production of electricity by the CIPEETenterprises. The national center in Bucharest controls five regional dispatch-ing centers. DEN has a computer system and a teleinformation system for thedispatch function. While the system is adequate for the near term, DEN plansto study the adoption of a new system for the late 1980s in view of thelimited expandability, capacity and dated technology of the current facility.

1/ Dispecerul Energetic National.

20

(c) Industrial Central for the Production of Electrical Energy and Heat -

(CIPEET 1

3.04 CIPEET is competently managed and, as one of the tw- MEE Centrals(para 2.03), controls and coordinates the activities of (a) its electricityand heat producing enterprises; and (b) its enterprise for capital and otherrepairs. The latter manufactures the machinery needed by the former formaintenance and repairs, and almost all necessary spare parts. CIPEET hasalso a centrally coordinated organization for the use by the enterprises forinstallations and repairs needed in connection with normal and forced mainte-nance and not carried out by MEE's specialized entities. The producer enter-prises of CIPEET are organized along the lines of CIPEET itself (Chart 3.2)and are headed by their Assembly of the Working People (generally meetingtwice a year) and managed by a Working Peoples Council and the Council'sBureau (functioning as an Operating Management Committee). The producerenterprises are charged directly with responsibility for:

(a) production of electrical energy as ordered by DEN, andof heat, and according to contracts concluded with theircustomers (e.g., industries, local governments);

(b) maintenance and repairs of facilities under their control;

(c) saving of energy and fuel according to conservation plans;

(d) expansion of their facilities through investments;

(e) meeting their technical and financial/economic plantargets; and

(f) recruiting, selecting and training of employees to operateand repair facilities under their control.

(d) Industrial Central of Power Network Enterprises - (CIRE2)

3.05 CIRE (Chart 3.3) competently controls and coordinates the 17 trans-mission and distribution enterprises--IREs 3/--which usually provide servicesin several counties. The IREs have specialized organizations for the trans-mission and distribution for (a) design (up to 110 kV) and construction oftransmission and distribution facilities 4/; and (b) operation and maintenance

1/ Centrala Industriala de Producere a Energiei Electrice Si Termice.

2/ Centrala Industriala de Retele Electrice.

3/ Interprindere de Retele Electrice.

4/ Facilities include medium and low voltage distribution, public lighting,rural electrification, connections of customers.

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of substations and transmission lines. The transmission and distributionenterprises' internal organization and functional responsibilities followclosely those described for the producer enterprises, except that:

(a) all their operational activities are under the control ofthe DEN system;

(b) they control the delivery of electricity according to contractsconcluded and quotas assigned; and

(c) they carry out the design and layout of transmission and distribu-tion lines which are implemented by their own construction units.

(e) Trust for the Construction of Hydro Power Projects (TCH)

3.06 TCH, an organization within MEE, was established in 1950. It hasbuilt more than 3,000 MW of installed hydropower capacity. Its scope of workcovers the full range of civil engineering of hydropower facilities (construc-tion of dams, tunnels, underground and surface power houses). During the next5 years TCH is expected to install an additional 3,000 MW of hydropower andalmost double its work force of 27,000. TCH has a shortage of large capacityconstruction equipment (including that required for earth moving and tunneling)which will be accentuated by this large program. This shortage and of materials,such as reinforcing steel, bitumen and special cement for dam constructionhave contributed to construction delays in the past. The proposed loanprovides financing for some of the heavy equipment and materials, and TCH is,therefore, included as a project entity.

(f) Staff Training Facilities

3.07 The high level of professional competency in the subsector is thedirect result of a long range approach and program for preparing all staff andworkers for the increasingly sophisticated requirements of the Romanian powerand heat networks. While direct contacts of professionals with advancedwestern power technologies remain limited, local professional skill isperiodically updated at the MEE Professional Staff Training Facilities with acenter in Bucharest and branches throughout the country. This trainingconcentrates on staff with experience, but additional facilities exist in thetechnical institutes at university level.

3.08 In addition, 18 specialized industrial schools under MEE trainworkers, foremen and technical staff in the special skills needed by theCIPEET and CIRE enterprises and the trusts and enterprises of MEE for theconstruction and operation of facilities. This training is reinforced throughtraining provided by the enterprises in courses and on the job.

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IV. THE DEMAND FOR ELECTRICITY AND HEAT AND MEANS OF MEETING IT

A. Planning and Forecasting

4.01 Planning and forecasting are the responsibility of MEE's Planningand Development Department. Its specialized agency, ISPE, has mathematicalmodels for the study of the economic development of the power system e.g.system demand forecasting, analysis of plant reserve margins and optimizationof development (para 2.16). The models are based on techniques as used inother countries having power systems of similar complexity. The results ofthe MEE planning are shown in Annex 4.1 which summarizes the generatingcapacity, energy production, peak load and load factor for 1976-1985;Annex 4.2--sector generation and sales for 1972-1985 maximum annual peak loadperiods; Annexes 4.3 and 4.4--planned generation reserve for end and mid-yearpeak load during 1980-1985; and Annex 4.5--MEE's interconnected system--plannednet capacity additions to 1985.

B. Load Growth Forecast

4.02 The annual growth of electricity sales during 1960-1970 was rapid atsome 16%; during 1970-1975 it fell to about 9.4% on average; and after 1975it was still lower at about 6.4% because of the impact of the energy savingmeasures enforced since November 1973 and for the reasons stated in para 2.22.In the Romanian system, the estimates of future requirements are derived fromstatistical trend analysis, analysis of the electrical energy requirements toachieve the industrial targets for the next FYP period, and the socio-economicindicators for the period considered. This has led to the judgment that, onaverage, the 1981-1985 annual growth would be 5.3% for electricity sales and4.7% for electricity production (the latter being lower due to change ingeneration mix). However, load growth is not uniform, slowing down somewhatmidway through the FYP period. The forecast is shown in Annex 4.2; itmay well be on the low side overall.

C. Power and Electrical Energy Balances

4.03 The power sector development program (para 5.02) as prepared by MEEand its institutes would meet the predicted load. They use data supplied bythe generating, transmission and distribution enterprises of CIPEET and CIRE.The expansion plans are closely coordinated with the FYPs and reviewed annually.As shown in Annexes 4.3 and 4.4 the system reserve capacity during annual peakin 1981 will be 37.2% and reduce to about 27.0% in 1985; during mid-year peakload in 1982 it will rise to 44.1% and reduce to about 38.8% in 1985. Whilethese reserves are on the high side, being the result of planning for higherload growths and the addition of co-generation plant based on burning indigenous

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coal, the reserves would reach more normal levels should the rate of develop-ment of electrical energy consumption exceed the relatively low growth assump-tions or the construction program be delayed which could happen in the earlyyears of the 1981-1985 FYP.

4.04 The construction program through 1985 would provide for maximumutilization of indigenous lignite and hydro resources. By 1985 lignitefuelled plant will annually consume about 62.6 Mt. With the exception of theDanube river schemes (about 1,670 MW by 1985) the hydro power additions arebest suited to meet the system demand during peak load periods.

D. Heat Supply

4.05 MEE's sale of heat earns about 10% of revenues in the subsector.Total MEE heat production grew at about 6.3% p.a. during 1975-1979. During1981-1985 it is expected to increase at about 7.0% p.a. (Annex 6.1). The heatsupply, now predominantly from gas and oil burning plants, would be providedin the future by the new co-generating plants burning lignite and/or coalcoming on line in the next FYP period. The existing gas and oil burningplants would provide a standby reserve for unforeseen peak demands (e.g.during cold winters), outages and other contingencies.

V. THE PROJECT

A. Objectives

5.01 The proposed project is a time-slice 1/ of the investment program ofCIPEET, CIRE and DEN (para 7.01) representing the July 1, 1980 to June 30,1983 period. The project would include all power and heat subsector investmentconsisting of the facilities for which financing and procurement commitmentswould be made in that time-slice period. Its objective is to provide thefacilities for the production and supply of electrical energy and heat, asrequired for the Romanian economy under the 1981-1985 FYP. The major aim willbe to help implement the subsector policy and strategy set out in detail inparas. 2.15 (i) to (iv), i.e. (i) widen the use of the primary resource base;(ii) continue energy conservation efforts; and (iii) improve subsector institu-tions. This would be the first loan of such nature to Romania; hopefully itwould improve the dialogue with the subsector institutions and the Governmenton the future energy development plans with a view to identifying suitablefuture projects.

11 The proposed Bank loan would finance only items for which contractsare awarded during the time-slice--for projects ongoing or to be startedin the time-slice period--and would exclude the facilities under construc-tion in Turceni Stages I and II and at Riul Mare-Retezat.

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B. The 1980-1985 Subsector Program

5.02 The list of individual projects in the program is impressive. Inaddition to some 80 MW in 7 small hydro plants (of 1 MW to 25 .W) the programcan be summed up as follows:

No. of TotalPlants Type Capacity - MW Range - MW

24 Hydroelectric 3,400 32 to 4026 Thermal, straight condensing 4,280 200 to 2,64017 Thermal, power and heat 2,680 50 to 24027 Transmission substations 6,700 /1 200 to 500 /112 /2 400-kV lines 1,363 73 29 to 282 /35 /2 220-kV lines 206 3 15 to 43 /3

/1 MVA./2 Number of installations.73 km

C. Project Description

5.03 The Project comprises:

The tranche of the MEE investments in the time-slice period(para 5.01) in:

(i) hydroelectric power plants;

(ii) thermal plants for production of electrical energy and heat;

(iii) heat transport and distribution;

(iv) high voltage transmission lines and substations;

(v) medium and low-voltage networks;

(vi) heavy construction equipment for the subsector; and

(vii) other items, such as special automation equipment and instrumen-tation for power system operation and control.

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D. Engineering and Status of Project Elements

5.04 MEE's design institutes and other dependencies have capably preparedinternally the detailed planning, economic and other studies; designs;and engineering of the project. Their specific responsibilities, describedin Annex 2.1, are expected to continue during the proposed Project. Accordingto MEE supplied information, over 93% of the total list of projects (para5.02) is at the "Project de Executie" 1/ level of preparation (correspondingto about 90% of the investment). The rest of the large list of projects inthe program is at least at feasibility level. MEE's monitoring of them ismainly based on technical and economic indicators (Annex 5.4) which are alarge list of specific parameters to be achieved by and in the final design ofthe equipment and complete works of each project. IB has supplied a selectednumber of such indicators and has agreed to supply the balance of such indi-cators in the first semiannual project progress report for the more importantpower plant projects included in the program to 1985 and approved after fieldappraisal. For the remaining project, not yet authorized, the relevantindicators will be submitted as soon as approved. These indicators and thosein Annex 5.4 will be used by the Bank to monitor the progress of the proposedProject.

E. Cost Estimates

(a) Program (1980-1985)

5.05 Investments of CIPEET, CIRE and DEN (Annex 5.1) represent thebulk of MEE investments during 1980-1985 and would amount to about US$6,666million equivalent (using 18 lei/US$ 2/) including about US$1,279 million offoreign cost. These estimates are low but reasonable as they exclude themultibillion dollar nuclear program and also the investments of all theother parts of the MEE active in the power sector, such as research, planning,design, engineering, construction, erection, tooling, procurement, warehousing,and training. The program cost estimate was computed by MEE from detailed costestimates which were prepared in connection with the approval of each indi-vidual Project de Executie included in the Plan and the feasibility studies

1/ Corresponds to about bid level design.

2/ Appraisal estimates have been made at the 18 lei/$ exchange rate. Duringnegotiations, the Romanian delegation was not able to confirm that theexchange rate would be changed from 18 to 15 lei/$ on January 1, 1981.Subsequently, the Bank was officially informed that such change will bemade and the Romanian equalization fund abolished as of January 1, 1981.The estimate of foreign cost in equivalent $ is not affected by the newrate. Other effects from the change are minor. They would reduce thetotal cost estimate in equivalent lei marginally by about 4.5%, have asomewhat favorable effect on cash generation and improve the return oninvestment by about 0.4%.

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for the rest of the projects in the program. For the plant constructed after1979, the capital costs for hydro-electric stations range from US$606/kW foran 8-MW run of river plant to US$1,700/kW for a storage type plant with alarge reservoir (median cost is US$1,300/kW); for steam electric stationsthe range i-: US$430/kW to US$550/kW (median US$470/kW) for a lignite-firedstraight condensing plant and US$830/kW to US$1,050/kW (median US$900/kW) fora lignite-fired heat and power producing plant. For the same period the costsof single-circuit transmission lines range from about US$72,500/km toUS$132,000/km (median US$117,000/km) for 400 kV lines; and from US$46,000/kmto US$104,000/km (median US$65,000/km) for 220 kV. The specific investmentfor substations ranges from US$7.50/kVA to US$15.50/kVA (median US$12.00/kVA)for 400 kV; and US$8.00/kVA to US$11.00/kVA (median US$9.00/kVA). The aboveestimates are based on prices from Romanian suppliers. While realistic, whencompared with similar plant costs in south-eastern Europe, they are--onaverage--on the low side compared with costs in other developing countries orin central Europe. The projected expenditures for distribution (mediumand low voltage networks), while low in terms of total investment, appearappropriate considering that the industrial loads are supplied at high voltageand the residential and commercial loads represent only about 25% of totalconsumption.

(b) Project (mid 1980-mid 1983)

5.06 The cost of the time slice of the subsector investment would be aboutUS$3,193 million. The summary of the cost estimate (prepared by MEE), bymajor investment groups, is:

July 1, 1980 - June 30, 1983

10 lei Equivalent Million US$ /1LC FC Total LC FC Total

Hydropower plants 15.79 3.93 19.72 877.0 218.5 1,095.5Thermal plants 21.68 6.11 27.79 1,204.3 339.2 1,543.5Heat networks 0.18 0.02 0.20 9.8 1.2 11.0High-voltage transmission 2.83 0.12 2.95 157.0 6.5 163.5Medium/low-voltage system 3.09 0.06 3.15 171.9 3.6 175.5Other 0.24 0.16 0.40 13.5 9.0 22.5

Subtotal 43.81 10.40 54.21 2,433.5 578.0 3,011.5

Price contingencies 1.00 2.26 3.26 55.6 125.4 181.0

Total 44.81 12.66 57.47 2,489.1 703.4 3,192.5

/1 At lei 18 = US$1.

The underlying cost estimate for the sector investment for the January 1, 1980- December 31, 1985 period is shown in Annex 5.2. It is reasonable and basedon Romanian internal prices. The above subtotal includes physical contingen-cies as they had been included in the project costs at feasibility and Project

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de Executie level estimates. An allowance of 5 to 8% is built into MEE'sestimates in accordance with Romanian practice and legislation; it appearsreasonable in view of the advanced preparation (at "Executie" level) ofprojects before the Government approves them for inclusion in the Five-Year-Pa.and for implementation. Price contingencies are not included in MEE'sestimates, they are assumed above for local costs at an annual 1% during theperiod shown, and for foreign cost at 10.5% for 1980; 9.0% for 1981; 8.0%for 1982; and 7.0% for 1983; on this basis they were estimated overall at 6%(21.7% on foreign and 2.3% on local costs).

5.07 The estimated foreign expenditures, US$703.4 million, cover the costof direct imports, the foreign exchange content of local supplies and the pricecontingency. The proposed loan, combined with the remaining anticipateddisbursements under Loan 1242-RO and 1652-RO, would finance about 27% of theabove foreign exchange required and only about 6% of the total costs of themid-1980-mid-1983 program. The foreign exchange cost was estimated to consist(on the basis of typical plant costs, including of Turceni and Riul Mare-Retezat)of directly imported items; imported components incorporated into Romanianmanufactured equipment; indirect foreign exchange expenditure equivalent tothe depreciation of imported manufacturing and construction equipment used byRomanian suppliers of goods and works for the supply to the constructionprogram of MEE; fuels and lubricants used in construction; and materials suchas reinforcing steel and bitumen for which Romania is a net importer. However,the financial forecasts (Annex 6) are based on the costs for the goods andservices in local currency which are fixed and controlled by the State PricingCommittee, with the price escalation on the imported components and materialsof the Romanian manufacturers being absorbed by other than MEE under theRomanian pricing system. In the financial forecast, therefore, the costswithout price contingencies are used.

F. Financing

5.08 A detailed financing plan is shown in para 6.05. The local costsof the program are expected to be met out of the cash generation of theelectric power enterprises, loans from the IB and the State Budget. At thepresent time, the only known external sources of foreign exchange would be theproposed IBRD loan of US$125 million and about US$63 million expected to bedisbursed from previous Bank loans during the program period. Together, theseamount to 27% of the estimated foreign exchange cost of US$703.4 million. 1/The indirect foreign exchange costs of local supplies represent the bulk ofthe US$703.4 million. IB has agreed that the project is suitable for(commercial bank) co-financing and proposes to seek co-financing, if necessary,

1/ While the impact of the proposed Project on the foreign exchange require-ments would be US$703.4 million, the financial analysis is based on theexpected foreign exchange financial needs of US$578 million for theProject by MEE, CIPEET, CIRE and DEN. The difference had been assumedto be absorbed mainly by the Romanian equalization fund.

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to the extent required for carrying out of the project. In any event,the Government is obligated to provide the balance of the foreign exchangeneeded for the investment program, since, as indicated in para 6.06, theguarantee agreement, as usual, requires the Government to mak- the necessaryfunds available. The IBRD loan is, however, not conditional on the conclusionof co-financing arrangements, which, as in other lending operations withRomania, could follow signature of the Bank loan. The Romanians have beeninformed that the Bank would be willing to amend the loan agreement andexchange the normal memorandum with co-financiers on the normal cross defaultclause if it would be of assistance to obtain co-financing.

G. Implementation

(a) Responsibility for Program/Project Implementation

5.09 In MEE the technical project administration (design, engineering,execution) is assigned, according to their specific function and activity, toISPE, ISPH, ROMELECTRO (for imports), CIPEET, CIRE, DEN, and the individualenterprise which, in the end, will operate the new facilities. Foreignconsultants are only used to the degree urgent transfer of recent technologyrequires. The MEE organization is capable of organizing rationally andadequately all necessary activities to carry out the proposed project. Inlight of the multitude of projects and of their status (para 5.02) it is notpracticable to show a meaningful estimated implementation schedule.

(b) Procurement

5.10 The proceeds of the proposed loan would finance the items in theagreed List of Goods (Annex 5.3) estimated to amount to US$125 million. Theestimate is based on a List proposed by IB/MEE, of suitable items amounting toUS$160 million for procurement under a reasonable timetable. All equipmentand materials listed in Annex 5.3 would be subject to ICB 1/ except as notedbelow. The items would be grouped to form sizable bid packages for bulkprocurement to the degree possible. Repetitive items may be bid once under anannual delivery program. Minor quantities of shelf items or standard equipmentcould be procured under "international shopping" after inviting and receivingquotations from at least 3 foreign suppliers. The aggregate amount ofcontracts to be awarded under such shopping will not exceed US$1,250,000and, unless the Bank shall otherwise agree, each such shopping will not exceedUS$200,000. For purposes of bid comparison, a preference limited to 15% of thec.i.f. price of imported goods, or the customs duty, whichever is lower, wouldbe extended to Romanian manufacturers.

5.11 The total cost of items not produced in Romania and proposed byIB/MEE to be financed by the proceeds from the proposed loan as direct importsunder ICB, amounts to about US$4.1 million equivalent (or 3.3% of the loan).

1/ "ICB" stands for International Competitive Bidding fully consistent withPart A and, as applicable, with Part B of the Bank's latest "Guidelinesfor Procurement under World Bank Loans and IDA Credits".

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This amount excludes the directly imported items amounting to about US$5.3 mil-lion already Bank-financed under the Turceni and Riul Mare-Retezat projectsstill under construction during the execution of the proposed project andrecently ordered items amounting to about US$2.7 million. The total ofUS$12.1 million corresponds to about 1.7% of the estimated foreign costrequirements of the time-slice of the program. This reflects an expectationthat direct financing of imports by the proposed loan will not be substantiallydifferent from the ICB procurement experience gained under the Turceni II andRiul Mare-Retezat projects. Because of the capability and the competitiveprices expected to be tendered by the Romanian manufacturers and suppliers,direct local participation in the supply of equipment materials and civilworks is expected to amount to about 96% of all investment under the project.About 10% of the heavy equipment for civil works construction (excavators,crawler and wheel tractors) may also result in imports after ICB.

H. Disbursements

5.12 The proceeds of the proposed loan amount of US$125 million would bedisbursed as follows:

US$ Million % ofCategory Equivalent Expenditures

(a) Equipment for hydro and 48.1 100% of foreign and ex-thermal power stations and factory localthe transmission system

(b) Equipment for civil works 30.0 100% of foreign and(for construction of of ex-factory localhydropower facilities)

(c) Construction materials /1 46.9 100% of foreign and ex-factory local

Total 125.0

/1 Materials and supplies would be only those for which Romania is a netimporter (reinforcing steel and bitumen).

Based on these allocations and the agreed List of Goods, disbursements areestimated as shown in Annex 5.5.

5.13 The proposed loan closing would be June 30, 1984, one year after thetime-slice period, to allow for payment of retention moneys.

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I. Environmental Aspects

5.14 Tbh strategy of reducing the use of domestic and imported oil anddomestic natural gas in thermal power stations and expanding production ofhydro-electricity and use of low grade solid fuels is likely to have adverseenvironmental consequences. Atmospheric pollution in Romania is accentuatedby the frequent temperature inversions experienced, especially in the Danubebasin. Fortunately the lignite to be used increasingly in the power stationscontains low free sulfur (around 0.3%,and in Turceni 0.5%). Fly ash emissionwill be controlled by electrostatic precipitators having a 99% efficiency.Most of the lignite is open-cast mined, resulting in the temporary loss ofagricultural land. The reservoirs for the hydro-power will also inundateagricultural land.

5.15 On the other hand, the Romanian legislation to provide environmentalprotection, which was promulgated as Law No. 9 on June 20, 1973, is compre-hensive. It defines the responsibilities of the various departments of theGovernment; obliges the Ministry of Health to establish hygienic norms" forconcentrations of pollutants; provides for measures to limit atmosphericpollution and obliges agencies which withdraw land from agriculture or forestrytemporarily (as in open-cast mining) to restore it to its original condition.In line with this legislation, measures continue to be taken to reduce theenvironmental impact from power stations. High smoke stacks and electrostaticprecipitators are being installed at power stations to reduce the concentrationof pollution to levels corresponding to the legislated standards. In addition,cogeneration of heat and electric power at MEE thermal stations reduces use ofsolid fuels for heat production. Furthermore, the directives for the imple-mentation of the 1981-85 Five Year Plan call for strict observance of theadmissible limits in processes which produce pollutants. A member of the Officeof Environmental Affairs (OEA), after discussions in Bucharest, visited theMintia (Deva) power plant, as well as several pollution monitoring stations.Romania has now 40 such stations including 3 in Bucharest. Their records showthat S02 and particulates- concentrations are well below Bank guideline andmaximum allowable limits set in the Romanian standards. In the Turceni case,

the S02 concentrations vary between 5xlO g/m (most of the time) and

30xlO g/m (once) as measured by the monitoring station at the closest town.Most of the S02 observed is probably due to domestic heating. As Turceni,after completion, will burn 22 million tons lignite per year, the futureemissions have been modelled based on actual Mintia conditions. The resultsshow that all emissions will still be well below Romanian and Bank limits.

5.16 The monitoring of pollutant and enforcing of Romania standards arethe responsibility of two institutes. The first one, IMH (Institute forMeteorology and Hydrology) is in charge of 6 monitoring stations dealing withthe general Romanian conditions and located far away from cities. The resultsare regularly communicated to WHO (the World Health Organization). The secondone, IHPH (Institute for Hygiene and Public Health) monitor the other stationsand control industrial pollution at the emission sites. Their findings are

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sent regularly to WHO and UNEP (the United Nations Environmental Program).They monitor not only S02 and particulates, but also NOx, acid rain, and, forcertain locations, heavy metals and other toxicants. The equipment in thestations and in the institutes is up to date and well kept and the personnelwell versed in physical and chemical methods of analysis as well as environmen-tal and pollution control. The institutes are ready and willing to supply theBank with their results on a trimester or semester basis. The Borrower hasagreed to supply the Bank recorded pollution monitoring data, regardingemissions of S02 and particulates from the facilities included in the projectat the facility sites and at the surrounding areas.

J. Project Risks and Uncertainties

5.17 For the proposed time-slice project, physical risks in the executionof the individual projects are similar to those of the ongoing Bank financedprojects; the subsector has a demonstrated capability to cope with them.However, because of the large size of the projected expansion to switchthermal generation from the oil/gas to a lignite/shale base (and after1985--increasingly to nuclear) it is uncertain that the Plan targets (on whichthe appraisal is based) will be fully met. Delays in increasing coal supplyand completing the hydropower plants on time could lead to a temporary higheruse (a) of gas and reactivation of power plants normally to be in standby andalso (b) of imported coal in new coal burning plants. This delay would bringwith it a reduction in the proxy for the rate of return, but probably not downto the 4.5% level discussed in para 7.08. The situation would be aggravatedshould the load forecast for the period prove to be on the low side. In viewof the close monitoring of progress on projects, the Borrower and MEE areexpected to make timely and specific provisions to cope with these risks. Forthe longer term, the target of the Government s program to reach energyself-sufficiency in 1990 will depend on (a) fully implementing the nuclearprogram and (b) further expansion of the lignite and shale supply. A comparisonof targets set for both in the past and actual results indicates that thetarget may not be fully reached.

5.18 A load growth in 1980-1981 lower than projected would not have avery substantial financial impact (Annex 6), particulary if the constructionprogram should be delayed somewhat. Both events are most likely to occur,particularly in view of the Government's current reassessment of the energyconsumption and energy savings efforts, and the tightening of measuresto arrest the worsening balance of payment situation by a further reduction ofimports, including of those needed for manufacturing equipment and machineryfor the program.

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VI. FINANCIAL ASPECTS

A. Past Financial Performance

6.01 With electricity tariffs set as described in paragraph 2.18, theirrole as a signal to the consumers or in the allocation of funds is lessimportant than in other countries, and the financial rate of return of thesubsector is predictably low (between 1% and 3%--see Income Statements for1977-1985 in Annex 6.1 and Notes to the Financial Statements in Annex6, Attachment 1). Since the subsector's indebtedness and interest chargesare very low, and since it is not expected to produce more than a nominalreturn to the State by way of taxes and other distributions of income, it doesin fact not require as high a rate of return as utilities with more importantobligations to lenders and stockholders.

6.02 Cash generation, which is considered a more appropriate criterion,has been satisfactory, because of the subsector's low debt service (loanrepayment obligations and interest charges) compared with depreciation. Oneobjective guiding the operations of the subsector, as confirmed by the Govern-ment under Loan 1652-RO, has been that the subsector would generate on averageat least 30% of its own investment capital each year. This target has beenmet consistently until now as the internal cash generation has been 40% in1977, 47% in 1978 and 34% in 1979.

B. Future Financial Performance

6.03 On the basis of current MEE projections, the 30% cash generationobjective is expected to be met, with 34% in 1980 and 30% in 1981 (Annex 6,Attachment 1). MEE projections for 1980-1985 assume average tariff increasesof about 10% for heat sales in 1982 and 8% for electricity sales to non-domestic consumers in 1984 (Annex 6.1). However, because the projectedcapital expenditure during the years 1982-1985 is considerably higher thanthat during the preceding years, the cash generation contribution, with theseincreases, is expected to amount to only 27%.in 1982, 23% in 1983, 26% in1984, and 27% in 1985, significantly below the actual level achieved in1977-1979 and the expected level in 1980-1981. As stated in paragraph 2.18the tariff increases required during the next FYP period (1981-1985) are stillunder review, as is the FYP as a whole. During negotiations the Romaniandelegation indicated that the power and heat tariff increases are likely toresult in higher cash generation percentages than reflected in the financialprojections shown in Annexes 6.1 and 6.3. The Romania