DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

Not For Public Use

Report No. P-1399a-YU

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO

"VOD.OVOD:DUBROVNIK" - PODUZECE ZA IZGRADNJU I ODRZAVANJE

VODOVODA I KANALIZACIJE - DUBROVNIK

WITH THE GUARANTEE OF

THE SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA

FOR A

WATER SUPPLY AND WASTEWATER

PROJECT

December 5, 1974

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 It may not be published, quotedor cited without Bank Group authorization.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. 15.25

Din. 1 US$0.0656

Din. 1,000 US$65.57

Din. 1,000,000 US$65,573.77

* The Yugoslav Dinar has been floating since July 13,1973. The currency equivalents given above are asof August 1, 1974. The Yugoslav Central Bankestablished on October 29, 1974 a new interventionrate of US$1.00 equal to Dinars 17.23, an effectivedevaluation of 7 percent.

Fiscal Year January 1 to December 31

INTEMNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPIENT

REPORT AND RECOIMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A

PROPOSED LOAN TO "VODOVOD DUBRDVNIK"-PODUZECE ZA IZGRANDJU I ODRZAVANJE VODOVODA

I KANALIZACIJE-DUBROVNIKWITH THE GUARANTEE OF

THE SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA

1. I submit the following report and recommendation on a proposedloan to "Vodovod Dubrovnik"-Poduzece za Izgradnju i Odrzavanje Vodovoda iKanalizacije - Dubrovnik, with the guarantee of the Socialist Federal Republicof Yugoslavia, for the equivalent of US$6.0 million to help finance a watersupply and wastewater project in the commune of Dubrovnik. The loan wouldhave a term of 24 years, including four years of grace, with interest at 8percent per annum.

PART I - THE ECONOMY

2. A basic economic mission visited Yugoslavia in November 1972; itsreport entitled "The Economic Development of Yugoslavia" (R74-1) was distri-buted to the Executive Directors on January 2, 1974. An economic updatingmission visited the country in October 1974 and its findings are reflectedin this report. Basic data on the economy are given in Annex I.

Economic Trends and Development Issues

3. The Yugoslav economy has experienced rapid growth and significantstructural change during the past two decades. GDP at constant prices in-creased by about 5.5 percent per year and per capita GDP by over 4.5 percentper year. Average per capita GNP is estimated at around US$900 (1973). Thenumber of people engaged in agriculture has decreased both absolutely and asa percentage of the labor force, while the number engaged in industry andservices has correspondingly increased. However nearly half of the laborforce is still engaged in agriculture, most of it on small private farms.Industry accounts for 23 percent and services for 22 percent of the laborforce.

4. Two important features of the economy have been strengthened by therecent constitutional changes. Self-management, whereby the means of produc-tion used by different workers' collectives are given to them to manage, hasemerged as the fundamental right and obligation of every basic unit of orga-nized labor in whatever sector. Second, the responsibility for most importanteconomic and social policy decisions has been delegated to the Republics andProvinces. Against this background, Yugoslavia has placed increasing re-liance on the market mechanism and the opening-up of the economy to inter-national trade.

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5. The leading role in economic and social development has been playedby the social sector, which includes government, most enterprises ankd .itsUtu-tions such as libraries, hospitals, theatres and schools, and which ee- cuntsfor 85 percent of GDP and employs over half of the total labor force. All

the enterprises and institutions are under workers' self-management and re-sources are under social ownership. There is a private sector predominantlycomprised of peasant farms (with a 10 hectare limit on land holdings) andsmall enterprises (with a 5 person limit on the number of non-family workers),mainly in handicrafts, construction, trade, transport and tourism. In thepast the private sector has been relatively neglected by government policy.However, the government has lately been devoting more attention to privatefarmers with a view to accelerating the growth of agricultural production.

6. Despite a policy of fostering accelerated growth in the less-developed regions, major differences persist in Lhe levels of developmentamong Republics. The more-developed regions are located in the north andinclude 65 percent of the population. But even this area includes sizeablepockets of poverty, particularly in private agriculture. The less-developedregions are in the south and are generally more mountainous and less denselypopulated. This makes agriculture and transportation more nifficult. Thesoutlhern regions are rich in minerals, coal and hydro-power generating poten-tial. The development of these resources has provided the major stimulus forgrowth.

7. Although the economy of the less-developed regions has been growingat almost the same rate as the more advanced areas, per capita income haslagged behind because of faster population growth (1.6 percent per year ascompared with 0.7 percent in the more-developed regions). Conseqquently,regional inequalities have widened. Average per capita GDP in the less-developed regions now amounts to about 50 percent of that of the rest of thecountry. Yugoslavia's development policy aims at reducing regional inequal-ities by transferring investment funds from the more advanced to the less-developed regions. In 1972 these transfers amounted to almost US$300 million,about one-third of the less-developed regions' total investment expenditure.

B. In addition to significant regional income differences there aresubstantial sectoral income differences. For example, per capita GDP in pri-vate agriculture in Kosovo (by far the poorest region), is just over US$100or about one-ninth of the natioaal average. Many private farmers there sup-plement their incomes by working in the social sector but are, nevertheless,unable to maintain an adequate standard of living. Although incomes inprivate agriculture are somewhat higher in other parts of thle counutxy, thlevremain far below those obtaining in non-agricultural activities,

9. Thus far, the employment situation in Yugoslavia has remained man-ageable not least because of the sizeable temporary aigration abroad whiich,since 1972 has stabilized at a level of about 1.1 million. Open unemploymentis estimated to be around 3.5 percent of the resident active population (mid-1974), and in the private agricultural sector there is severe underemployment.There is considerable public concern about the size and composition of. the

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emigrant labor force. The Government expects that the economy has now reacheda level and momentum of development which should create an annual increase ofdomestic employment exceeding the natural increase in the labor force andpolicies are being introduced to encourage the return of skilled and educatedworkers and those who have been abroad for some time. However, due to an eco-nomic slowdown in major recipient countries, job opportunities abroad may de-cline and migrant workers may return faster than intended with potentiallynegative effects on domestic unemployment and on the balance of payments.

Recent Developments

10. Rapid economic growth since 1968 was accompanied by inflation andbalance of payments problems. Many enterprises experienced financial diffi-culties primarily as a result of over-zealous investment programs and a lackof financial discipline. To counter inflation and improve the external pay-ments position the Government, in 1972 and 1973, adopted measures aimed atrestricting monetary expansion, limiting public expenditure, temporarilystrengthening price controls, reducing the growth of personal income, improv-ing the financial structure of enterprises and imposing limitations on ex-ternal borrowing. In addition, to neutralize the inflationary pressure onthe balance of payments, the dinar was devalued by 16.6 percent in January1971, and again by 18.8 percent in December 1971. Since July 1973 the dinarhas been floating. 1/

11. As a result of these measures economic growth slowed from 8.8 per-cent in 1971 to 4.4 percent in 1972 and 5.1 percent in 1973. Exports in-creased during the same period at significantly higler rates than imports.Aided by a sharp rise in workers' remittances (up 36 percent in 1972) thecurrent account showed a surplus of US$419 million in 1972, the first sur-plus since 1965. A current account surplus was again achieved in 1973($464 million). Foreign exchange reserves increased from the equivalent ofabout one month's merchandise imports in 1971, to nearly 4 months by the endof 1973. There was no slowdown in the rate of inflation, however, and mostprices continued to rise at the rate of 15-20 percent per year through 1973.

12. In 1974 economic growth picked up again (reaching an estimated an-nual rate of 7 percent). This higher growth rate has been accompanied by arectirrence of the difficulties associ.ted with ripid growth, futrther am-plified by the changes in the international trade situation. The pace of in-flation is accelerating and the annual rate of increase in the leading indi-cator--the overall producer price index--is approximating 30 percent. Li'ui6-ity problems associated with the rapid increase of investment rate reappearing.The balance of payments has deteriorated due to the coincidence of worseningterms of trade, slow growth of commodity exports to countries in the con-vertible currency area, and stagnation of real net exports of invisibles.

1/ On October 29, 1974 the Yugoslav Central Bank established a new inter-vention rate of US$1.00 equal to Dinars 17.23, an effective devaluationof 7 percent.

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As a result, a current account deficit of about $1 billion is likely by theend of the year, and the coverage of commodity import requirements by reserveswould drop to about two months, the minimum level acceptable to the Yugo.larauthorities.

13. The Social Development Plan for 1971-75 projected an average GDPgrowth of 7.5 percent per year in real terms but it is clear that this willnot be realized. Even if economic growth in 1974 and 1975 reached that level,average growth during the five years would amount to around 6.8 percent, dueto the slowdown associated with the 1972/73 stabilization measures. Given theslow population increase this would still be rather high, and would comparewell with growth during the preceding five-year plan period (4.7 percent peryear).

The Energy Sector

14. On a calorific basis 67 percent of Yugoslavia's energy needs in1973 were met from domestic sources. Domestically-mined coal remains an im-portant source of fuel. Practically all thermal power plants are coal-fired.About 39 percent of the oil consumed is of domestic origin. Yugoslavia gen-erates more than half of its electricity from hydro plants despite the factthat hydra capacity has been developed only to about one-third of its poten-tial. The shortages of electricity that are emerging are not due to the lackof hydro generation potential, coal or oil, but rather to insufficient pla-ntcapacity and delayed construction. Yugoslavia maintains friendly relationswith nearby oil producers.

15. In spite of Yugoslavia's relatively low dependence on imported oil,increases in the price of oil are bound to affect the government's effortsto improve the external payments position. In 1973 oil imports amounted toUS$259 million, or 6 percent of commodity imports. For 1974 oil import pay-ments will be of the order of US$900 million, at an average c.i.f. price ofUS$100 per m.t. (US$13 per barrel), equivalent to about 13 percent of importsof goods and services. The impact on the balance of payments will be to con-tribute to a substantial current account deficit in 1974 and later years,instead of the surpluses Yugoslavia has enjoyed recently.

16. The indirect cuDsequences of the world energy crisis are unclear.On the positive side the availa:oility of coal and hydropower resources shouldimprove the country's international competitive position, although their de-velopment would require heavy investment with long gestation periods. On theother hand job opportunities fo' Yugoslavs working abroad may diminish as eco-nomic growth in Western Europe slows down. Returning migrant workers wouldexacerbate unemployment and housing problems and workers' remittances, whiclhhave played a dynamic role in the economy, may suffer. Moreover, stagnationin economic activity abroad could affect Yugoslavia's exports. Although therise in the cost of automobilc- and air transportation might have unfavorablyinfluenced tourism, preliminary data showing a successful 1974 season (perhapsaided by the troubled climate for tourism in the Eastern Mediterranean) in-dicate that it has not. These conflicting trends are being watched carefullyby the Yugoslav authorities and the Bank.

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Capital Requirements

17. Yugoslavia is dependent to a large degree on imported equipmentfor its economic development and the country has borrowed substantial amountsabroad. Gross capital inflows have more than tripled during the last fiveyears, reaching US$1,186 million in 1973, mostly in medium-term commercialcredit. However, due to rapidly rising amortization payments, an increaseof US$746 million in gross inflows between 1967 and 1972 resulted in an in-crease in the net inflow of only US$224 million. The growing discrepancybetween gross and net inflows reflects a shift, following the 1965 EconomicReforms, from long-term official loans to medium-term commercial credits asa result of the limited availability of official capital and the liberaliza-tion of foreign trade and borrowing. The United States, the Federal Republicof Germany, Switzerland, Italy and the United Kingdom have provided most ofthe commercial credits. IBRD, the Federal Republic of Germany, and the USSRhave been the principal sources of long-term official capital.

18. Until recently it was thought that muchi of the foreign exchangeneeded to finance imports would come from the growth of exports of goods andinvisibles. However, the energy crisis and other factors make it doubtfulwhether this source will continue to expand at its previous high rate and thecountry will, therefore, need to maintain a high level of foreign borrowing.Its gross long-term capital requirements are tentatively estimated at betweenUS$2.0 and 2.5 billion per year during 1974-79. Around US$500-600 million ofthis may be provided in the form of official development assistance from bila-teral and multilateral sources. The remainder will come mainly from foreignbanks and suppliers. Raising such large sums will be a formidable challenge,but Yugoslavia's success in the past in obtaining the funds it requires fromthe capital markets, and its continued good credit standing, give grounds forconfidence that it will be able to obtain the capital inflow required to fi-nance its development efforts.

Creditworthiness

19. In spite of the present unsettled international conditions, theprospects for Yugoslavia's continued economic growth during the next decadeare good. The country's endowment of natural and human resources, its rela-tively low dependence on imported energy sources, its pragmatic approach toeconomic problems and its readiness to undertake institutional changes, cor,-bine to give grounds for a favorable assessment of future prospects.

20. External public and publicly-guaranteed debt outstanding as of Decem-ber 31, 1973 was US$1,912 million. In addition there was US$2,407 millionnon-public external debt outstanding. Total (public and non-public) debtservice payments in 1973 were equivalent to 19 percent of foreign exchangeearnings. With external borrowing projected at around US$2.5 billion peryear during 1974-79, the debt service ratio (public and non-public) is expectedto decline over the next few years then rise again towards the end of the dec-ade. Taking into account Yugoslavia's debt service record and the measures

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taken in the past to control balance of payments problems, as well as the pro-spective growth of production and foreign exchange earnings, Yugoslavia remainscreditworthy for a substantial amount of Bank lending.

21. Many of the high priority projects in Yugoslavia have a low foreignexchange component due to the relatively advanced state of Yugoslav industryand the competitiveness of Yugoslav contractors. Were the Bank to confineits lending to the foreign exchange costs of projects, an adequate contribu-tion to Yugoslavia's external capital needs could be made only by spreadingthe lending over a large number of projects, including some of lesser prior-ity. Therefore it seems reasonable to provide for some measure of local ex-penditure financing in the Bank's lending program.

PART II - BANK GROUP OPERATIONS IN YUGOSLAVIA

22. The Bank has made 31 loans totalling about US$1,015 million toYugoslavia. Of this amount approximately 50 percent (US$531.4 million) hasbeen for 12 loans for the transportation sector - six for highways totallingUS$180 million, four for railways totalling US$248 million, US$59.4 millionfor the Naftagas pipeline loan approved in 1973 and $44 million for the re-cently approved Port of Bar Project. Bank lending has generally concentratedon infrastructure including, in addition to the transportation loans. power(three loans totalling US$135 million), telecommunications (one loan for US$40million), and three multipurpose projects totalling US$103 million. Nine loanshave also been made for industry, two for tourism and one for agricultural in-dustries. This would be the second loan for Yugoslavia during the currentfiscal year and the first ever for a water and sewerage project. !FC has madeeight investments in Yugoslavia totalling about US$80 million.

23. In the last few years delays in loan effectiveness have hamperedproject implementation. To some extent delays are inevitable since the clear-ance of loan documents involves all the Republics and Provinces in every case.Conditions of effectiveness can rarely be met speedily regardless of how wellthe ground is prepared. Yugoslavia has been continually evolving her consti-tutional processes and the approval of a new constitution earlier this yearshould facilitate a bett'r understanding of what is required to get projectimplementation off the ground quickly. There are encouraging signs of this.Tlhree of the six loans approved .ii FY74 have already been declared effectiveand disbursements have started under all three of them. But this problem willcontinue to be closely monitored by the Federal authorities and the Bank.There lhave been delays in the execution of several projects including theBelgrade-Bar railway project and the Bernardin and Babin Kuk tourisma projects.Since the Babin Kuk enterprise is helping to finance the proposed project,steps have been taken to ensure that implementation of the Babin Kuk projectshall proceed on a satisfactor.y schedule in the future (see paragraph 53 andAnnex II). Annex II contains a summary statement of Bank loans and IFC in-vestments as of Oct.eher 31, 1917Z and notes on the execution of on-goingprojects.

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24. The major objectives of Bank lending to Yugoslavia are to accelerate

development in the less-developed regions of the country; to promote agricul-tural development, particularly among the small private farmers by providingbasic infrastructure and credit for the financing of farm development, equip-ment and processing facilities; to promote structural reforms in major sectorsof the economy through improved coordination and the strengthening of institu-tions; and to provide Yugoslavia with long-term external capital and thushelp reduce the country's dependence on short-term external borrowings.These objectives are basically the same as those which have guided Bank lend-ing in previous years, but efforts to give special support to the less-

developed regions and the small farmers are being strengthened.

25. Over the next two years loans envisaged for less developed areasinclude power generation, urban pollution control (City of Sarajevo) and two

multipurpose (water supply/sewerage, power and irrigation) projects. Highway,railway, power transmission and oil pipeline projects will promote structuralreforms in the transport and energy sectors. A high priority agriculture creditproject will assist small private farmers as well as social sector enterprises.IFC is currently investigating several new investment opportunities to encour-age joint venLures which would provide technical, management and marketing ex-

pertise as well as long-term capital.

26. In addition to substantial assistance given in identifying and pre-paring projects for Bank financing, the Bank is providing technical assistancein several areas. A series of regional studies of the four less-developedregions of Yugoslavia was initiated two years ago and two studies, coveringKosovo and Bosnia-Herzegovina, have been completed. This series, when com-

pleted, will contribute to better assessment of development programs and willassist in formulating development strategies for these regions. Other currentactivities include assistance with a study on the Yugoslav capital market de-signed to help improve resource mobilization and allocation, and assistancefor a training program for auditors of the Social Accounting Service, whichaudits all enterprises and Government activities, including Bank financedprojects.

27. Bank commitments to Yugoslavia have averaged about US$100 millionannually in the last three years. Although this has represented only a smallproportion of the country's need for external finance, it has been equivalentto almost one-third of the annual long-term official capital inflow in conver-tible currencies. Even assuming that the level of Bank lending continues torise substantially during the next five years, the outstanding debt to theBank would remain about 10 percent of Yugoslavia's total external debt.Service on Bank loans as a proportion of total debt service would increase

from 3.2 percent in 1973 to 4.8 percent in 1976.

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PART III - THE SECTORS

Water Supply and Wastewater

28. Water supply and wastewater disposal is the responsibility of localcommunities in Yugoslavia. Public service enterprises plan, construct andoperate water supply and wastewater systems in the communes (the basicpolitical-administrative areas) or cities (two or more communes may join to-gether for administration of large population concentrations).

29. The Federal and Republic Governments are interested but not directlyinvolved in the sector. Increasing national attention is being paid to theproblems of water pollution and to the integrated development of water resources.The authorities wish to preserve the relatively high quality of their coastalwaters and improve the quality of inland waters. Special attention is beingpaid to the Adriatic Coast, the major tourist attraction in Yugoslavia. Sev-eral cities along the coast are pursuing projects similar to the one proposedhere.

Tourism

30. Gross foreign exchange earnings from tourism have risen from US$22million in 1960 to US$630 million in 1973, an average annual growth rate ofabout 30 percent. As a proportion of total convertible currency earnings,tourism receipts rose from 3 percent in 1960 to 15 percent in 1973. Tourismrelated employment has grown correspondingly. Since most tourist attractionsare in areas with few other employment opportunities, the beneficial impactgoes far beyond the foreign exchange earned.

31. Eighty percent of Yugoslavia's tourists go to the Adriatic Coast.The clear sea water, scenic coastline, mild climate and strong culturaltraditions attract visitors from Europe and North America. Dubrovnik is thehub of this activity. It is centrally located on the southern Adriatic, iseasily reached by sea or air and has major attractions - a medieval walledcity, summer festivals and pleasant scenery.

PAR' IV - THE PROJECT

32. Expanded water supply a.nd improved wastewater systems are essentialto service growing numbers of tourists and to preserve Dubrovnik's environ-ment, especially the coastal waters. Tourist usage of Dubrovnik visitorfacilities grew from about 2 million bed-nights in 1965 to 3.6 million bed-nights in 1973, an average rate of increase of about 7.8 percent per year.Additional facilities are under preparation--including the Babin Kuk hotelcomplex--and usage is expected to grow at an average annual rate of about 7percent from 1973 through 1980.

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33. The current water supply system can be satisfactorily expanded butmajor changes are needed in the wastewater disposal system. To avoid dumpingraw sewage in the sea through numerous small outfalls, many of which are nearareas frequented by tourists, the sewer network has to be renovated and ex-panded, a treatment plant built and a proper outfall system installed. Inaddition, new regulations are needed if the wastewater system is to be proper-ly managed.

34. In the Commune of Dubrovnik (which includes the town and surround-ing coastal area) the enterprise responsible for the water and wastewatersystems is "Vodovod Dubrovnik" (or Vodovod). It would be the Borrower forthis proposed loan. Vodovod is autonomous in the day to day operation of thesystems but requires Commune approval of its charter and changes in tariffrates. The Commune coordinates local enterprises, including Vodovod, con-cerned with the general economic and social welfare of the Commune and mayorder Vodovod to carry out public works at the Commune's expense. Vodovod istechnically well managed but needs to strengthen its financial management.

The Project

35. The project was identified in October 1970 during the appraisal ofthe Babin Kuk Tourism Project (for which the Bank is lending US$20 million,including funds for feasibility studies of infrastructure, Loan 782-YU). Pre-paration missions in May and September 1971 and in July 1972 assisted withstudies of the marine environment, proposed disposal system and alternativelayouts for the sewer network. The Project was appraised in May/June 1973.After delays due to difficulties in finding a mutually acceptable date, nego-tiations were held in August/September 1974 in Washington. The Yugoslav de-legation was led by Mr. Gavra Popovic, Assistant Federal Secretary for Finance,and included representatives of the Federal Government, the Socialist Republicof Croatia, Commune of Dubrovnik, Dubrovacjka Banka and Vodovod.

Project Description

36. The project is summarized in Annex III and described in detail inthe report entitled "Appraisal of a Water Supply and Wastewater Project forDubrovnik, Yugoslavia", No. 356a-YU and dated October 9, 1974, which is beingdistributed separately. It would comprise extensions and improvements to theexisting water supply system and major reconstruction of and minor extensionsto the existing wastewater system.

37. The water supply component would include:

(a) expansion of the main pumping station and installation of anew water main,

(b) construction of a reservoir at Babin Kuk, and

(c) renovation and extension of the distribution system.

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The wastewater component would include:

(a) modification to existing and construction of additionalsewers, including pumping stations,

(b) construction of a treatment plant and outfall sewer, and

(c) purchase of operations and maintenance equipment.

Project components common to both systems would include acquisition of land,expansion of headquarters and hiring of consultants for design, procurementand construction.

Project Execution and Operation

38. Vodovod would execute the project with the help of consultants.Final design and preparation of tender documents is currently underway andsite construction is expected to begin in mid-1975. Project completion isexpected by mid-1978. The components which will serve the Babin Kuk tourismcomplex are scheduled for completion in mid-1976 to coincide with the openingof that facility.

39. Operation and maintenance of the expanded and improved systemswould be the responsibility of Vodovod. In order to effectively dischargethis responsibility Vodovod needs to strengthen its financial management andimprovements in the local regulations governing the use of the wastewatersystem are required. A new Financial Director would be hired and Vodovodwould take steps to correct current weaknesses in accounting, outstandingreceivables and tariff rates (see paras. 43 and 44 below). -The Commune hasagreed that regulations governing the use of the wastewater system would beeffective not later than June 30, 1975, and a formal undertaking to thiseffect would be a condition of effectiveness of the proposed loan (Recital(I) and Section 7.01(c) of the Loan Agreement).

Project Cost and Financing

40. The total cost of the project (including duties and taxes but ex-cluding interest durine zonstruction) would be US$9.6 million. Since Yugoslavcontractors are expected to win most of the bids, the foreign exchange compo-nent would be only US$2.1 millioii or about 22 percent of total cost. Physicaland price contingencies would represent about 32 percent of the total cost.

41. A Bank loan of US$6.0 million is proposed. It would finance about50 percent of total project costs plus about US$1.2 million of interest duringconstruction on the Bank loan. The loan would cover about US$2.7 millionequivalent in local expenditure. Under the decentralized Yugoslav system, noFederal support is available for local investments. Scarce Republican funds,rationed among all communities, can contribute only a small amount. The majorburden of financing this project thus falls on the Commune. The 60,000 resi-dents of the Commune would contribute through the tax supported Commune Budgetand by paying increased water and wastewater tariffs. Founders (local enter-prises functioning as shareholders) of the DtiJbrovacka Banka would forego dividends

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to provide a subsidized loan. However, without a significant Bank contribution,a viable financing plan for such a major investment by so small a communitywould not be available.

42. In addition to project costs of US$9.6 million and interest duringconstruction on all loans of US$1.3 million, Vodovod requires financing forUS$3.6 million of other capital expenditures in its investment program and forincreases in net working capital during the construction period. Thus, totalfinancing required between 1975 and 1978 would be about US$14.5 million. TheBank loan would provide about 41 percent of thiese funds. The remainder wouldcome from loans from the Republic of Croatia and Dubrovacka ]anka (about 14 pu'-cent), contributions from Babin Kuk, otlher enterprises and consumers and theCommune (about 17 percent) and internal cash generation (about 28 percent).The execution of undertakings satisfactory to thie Bank for the provision ofthese loans and financial contributions would be a condition of effectiveness(Recitals E, F, G, and H, and Section 7.01 (c) of the Loan Agreement). TheCommune has agreed to provide Vodovod with any additional finance that may berequired, and a formal undertaking to this effect would be a condition ofeffectiveness of the proposed loan (Recital (H) and Section 7.01(c) of theLoan Agreement).

43. To meet the obligations of the project and secure its financialfuture Vodovod needs to increase water and wastewater tariffs. The enter-prise has until recently operated with low tariffs which resulted in modestprofits and declining rates of return and has carried large amounts of out-standing receivables (equal to about four months revenue). The charges forwastewater disposal do not cover the operating expenses for that service.Capital investment has hitherto been financed with long-term, low-interestloans which are no longer available.

44. Vodovod and the Commune (which must approve all tariff increases)have recognized the need for higher tariffs. In July 1973 water rates wereincreased about 33 percent and wastewater rates about 25 percent. After dis-cussions with the Bank, rates were increased again in July 1974--water by 20percent and wastewater by 100 percent. Further increases of about 75 percentfor water and another 100 percent for wastewater will be needed by 1979, whenthe project would become operational and the full impact of the additionaldebt would be felt. The Bank has recommended a program of annual tariff in-creases through 1979 which would meet these requirements and would Drovideadditional cash generation for project investments during the constructionperiod. Vodovod and the Commune's acceptance of this recommendation is re-flected in their agreement to set tariffs sufficiently high to generate fundsfor construction equal to 4 percent of the gross value of Vodovod's utilityplant, including work in progress, during construction and to maintain a rateof return on fixed assets in operation of at least 6 percent after the projectbecomes operational (Loan Agreement Section 5.05). To obtain a more accuratereflection of the rate of return, the depreciation rate on major fixed assetswould be increased from 1.5 to 2.0 percent (Loan Agreement Section 5.07).Vodovod also agreed to use their best efforts to reduce outstanding receivablesto no more than 2.5 months revenue and to keep additional debt within limits(Loan Agreement Sections 5.04 and 5.06).

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45. The new wastewater charges would allow Vodovod to cover the fulloperating costs of that service from its own revenue. The new water chargeswould generate sufficient revenue to cover water supply costs and provide theadditional funds needed to meet the enterprise's overall rate of return require-ments. Because Vodovod supplies virtually every household and enterprise inthe Commune with water, but not all use the wastewater service, some indirectcosts of wastewater service would thus be borne by the water consumers. Inthis way virtually all residents would participate in the indirect cost of acleaner environment.

Procurement and Disbursement

46. Contracts for the supply and installation of equipment and for civilworks expected to cost more than US$100,000 would be put to tender on thebasis of international competitive bidding in accordance with the Bank's"Guidelines for Procurement". A margin of preference for local equipmentmianufacturers of 15 percent or customs duty, whichever is lower, would beused for bid comparison. Contracts expected to cost less than US$100,000would be let according to the Borrower's usual procurement procedures whichare considered satisfactory. Vodovod would carry out by force account minorworks such as renovations and modifications to the existing water and sewernetworks. The total value of such minor works is expected to be less than10 percent of the project cost.

47. Major supply and civil works contracts are expected to be won byYugoslav firms; contracts for some specialized equipment for the treatmentplant and pumping stations would probably be placed witlh foreign subcontrac-tors.

48. Tihe proposed Bank loan would be disbursed to finance the c.i.r.cost of imported equipment; the ex-factorv cost of locally manufactured equip-ment; 100 percent of the cost of consultants; 35 percent of all civil workscontracts; and interest during construction. The percentage relating to civilworks contracts would be adjusted as necessary to provide continuous Bank dis-bursements over the implementation period of the project.

Audit

49. Vodovod's accounts would be audited by the Social Accounting Serv-ice (SAS), an autonomous govermniiental agency responsible for financial in-spection of Yugoslav economic enterprises. It audits all Bank financed proj-ects in Yugoslavia. SAS started a training program in January 1974 underwhich its staff are being trained by Coopers and Lybrand of the U.K. in audit-ing methiods consistent witn internationallv-accepted requirements. Since itis likely to be some time before it will be possible to fully realize theobjectives of the pro,ram, Vodovod gave the Bank informal assurances it wouldengage other auditors if SAS is unable to achieve a consistent and satisfactorystandard of auditing.

- 13 -

Justification

50. Tourism is an important sector in the Yugoslavia economy. It gen-erates incomes in areas with few other employment opportunities, finances(through taxation) local social and economic investments, and earns sizeableamounts of foreign exchange (about 15 percent of total exports of commoditiesand services in 1973). As a national leader in attracting tourists, Dubrovniknot only develops itself through tourism but also contributes to nationaldevelopment.

51. Dubrovnik needs adequate water supply and wastewater infrastructureto continue to attract growing numbers of tourists. Tourism is highly sen-sitive to environmental conditions. In 1972, for example, a smallpox epidemicin Kosovo--about 150 km from Dubrovnik--caused Dubrovnik's visitor level todrop by 7 percent while before then it had been growing every year. IfDubrovnik's water supply system does not keep pace with growing demand and ifwastewater is not properly disposed of, the environment will be degraded andtourism will suffer.

52. The project represents the least cost solution to providing potablewater and disposing of wastewater. Institutional reforms to help maintainadequate water and wastewater systems in the future would be promoted. Withthe agreed tariff structure, the economic rate of return for the water supplyinvestments would be a minimum of 10 percent. The benefits of the wastewatetdisposal system cannot be so precisely quantified--they wouldi he foundt in clearharbors and beach waters, less noxious odors, reduced risk of epidemic disease,and, most importantly from an economic viewpoint, in continued flows of tourists.

53. About 5 percent of the proposed water and wastewater facilitieswould directly serve the Babin Kuk complex, and about US$1.6 million of thefinancial requirements for this project would be provided by the Babin Kukenterprise. The Babin Kuk project, as reported in Annex II, has been scaleddown drastically in view of the approximately 100 percent increase in con-struction costs over the estimates at the time of appraisal. I have separatelysought your agreement to the amendment of Loan 782-YU to reflect the scaling-down of the Babin Kuk project. In the unlikely event that any shortfall infinancing for the proposed project resulted from any failure on cie part ofthe Babin Kuk enterprise to honor its commitments, the commune would be res-ponsible for covering the shortfall.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

54. The draft loan agreement between the Bank and "Vodovod Dubrovnik"-Poduzece za Izgradnju i Odrzavanje Vodovoda i Kanalizacije Dubrovnik, the draftGuarantee Agreement between the Socialist Federal Republic of Yugoslavia andthe Bank, the Report of the Committee provided for in Article III, Section 4(-ii)of the Articles of Agreement and the text of a draft resolution approving theabove loan, are being distributed to the Executive Directors separately.

- 14 -

55. Provisions of the Loan Agreement of special interest were noted inparagraphs 39, 42 and 44.

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

PART VI - RECOMMENDATIONS

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

Robert S. McNamaraPresident

Attachmients

ANNEX IPage 1

COdbTHI_2DATA- iA!7Lil1A

ARKA POPULATION IflSDTY

,55,201. iou 20.77 milliOn io-d-1972) 202 Per W.fDs .arbla land

SOCIL INDICAT.ORS

Pot Rl .2f:P%".C~ r lQes.0~ 1 0 -1.-2 tm rp1970 1R1970) 1970ep

INP PER CAPITA U51$ (ATLAS RASIS) /I 375 810 Ia 780 Ia 810 /a 3,390 I.

Crd brh rate (per theusand) 25 1831 21 13.LCrude death rate (per rthousud) 10 9 10 10 12.1Infant ..mortlity rate (per thousad live births) 33 56 58 1, 23.5Life expectancy at birth (yours) 0y 65 67 lb 69 69.L

Gross reprodu-tIon rata 2 1.3 '( 1.5 lb 1.3 1.2Popolation gToath rats 1.7 0.0 to 0.97W 1.0 Ic 0.9 InPopulation groath rate - urban 3 I . 37Ia

age stru-tur (percet)0-11, 31 2F3 28.7 If 26 23.0 /t

15.61 c 61 62.5 7Th 65 63.6 7TuS aol 000 9.2 7Th 9 13. L75

3e-ondenuy ratio /l, 0.5 ~~~~~~~~~~j 0.8 1.0 0.7 3.2 75U'rban rohaoin aSpren ftota 29 Id. 35 Id .. In 38.1, 11hOunil pan Ng; R of anoeptors o-latlo- (thou,) ..

No. or s... (% ornrudass ....i

Total acor orce thousands) 0 Sr?if 31,01 9,300 I; '6, cO0 /f

P-ruetuga e-ploYd in, agriculture 5? h5 36.o be 7i 7.2- prj-oontgsunrploynd3A 33/nd . 0.C , b

INCOME DDISTRIBTIONPerosn of ntiona i.cus lrecisad byhighost 5% 1 Isn 1 s .1L'Pseator ntoa jocose ro dby highnot 20% I '.

PN-.=tf,.i. Ii.... .. i by boos ... t 20% 7 7 77 ,1LP.rc__tof- noiona iuosn_ ronni-d by lowet 1,0% 19 c, 19 7

DISTRIBNTITON OF LAND OWN4ERSHIP% ownd by top 00%. of naer% o,rn-od by s..l11st 10% of -anrn

HEALTH AND HITIITIONPopulation T;e phiysicluo., /1 1 011 1,100 811 /I

.Poplation per nursing parson 00o 277 I-,o 90 I0 / 2-fu fl :1Ppulstin per hospital bed l1 0 1/0 1 10 2

Per capita calori supply an % of rquirenents /5 117 D I 11 1 10ii 1 20 P,or caPitaProtnin supply, total (grus encr daytL6 T, 7 j 77 8p 2 3 1 7-7

Of eh i., n-sa und poles 2 787 102 5,677eath at 1-1 year /7 r 2c.- 3 .' IfO1 .,9/f

EDUHOCATI ON

A:1Justsd 75su ndr -chool enrleset ratio 3? I 65 2Tears af EbhntIing p-oidod, first and -nood l-esi2 I 13 1- I L 12 15

Ocslnlsnolnn as % of e.' school .. rn.t11nt 7232 57~ IonvAdu-lttliteracy rate 8 77 35 /1 L...1 I:

HOUSINGA-soaga No. of per..ans pe,r mo (urban) /r1. .f 1._ Is P.roent of onopi.d u.its without piped aatso '58 7

co ; b8o oiAHo..sse ta elnotriolty (us % of total poplation) 7 a 37Tht77

0L~

Poroent of taral pepolatbn nona-oted to e1sotricity V7/ 0La ~ .2 __

CONSIJMPTION.a. rooe per 1000 pojenltton, 112 1-2

Pas..seger oars Per,1003 populat ion 35 O0. ~ Elantrin pener oonosptina (khb p.o. 522 I 1,28, 766 1,615 .Neonprint o--uption p-o kg per year 2 13 . 2.5 1.

Notr- P'Ig-n rrfrr rithr- to thr latent perioda o t,. dnnoat,.of. b ean onneental taprturn, bodywugta, andtho latest yearn1. Ltent psrlodo efs -- In prianiple to ditibtonb aeai u ofrntoa popuotlnnase..bthe yra re1960or1966-70; tin latest yeura in pria- /6 Protein standards (-enrset)re l outiias,tciplo to 1960 and 1970. tunhad by USDA E..ononin R-asrnl Serio provide for a nlihuonj1 Thn Per Capita GNP -atlnto 10 nt -eaot po1ocu for al..a... o f 60 gruin of total Protein Per doY, and 20 groe of

Ycuru otbr tha- i~o uolidby the uasrnnvrlo e 1a and puloa protein,, of abioh 10 graa should in -nisu12teblque on ibo i%f972 Acrid baIh Atlan. protein. 7hse stadards ar soseaht luaar than thooe of 75

A_ vergenuhro duoghtero pero a- of espoduotlee grar of total protein and 23 graa of -itn.1

protoi. us a-age ovrge for its -Ied, proposed by PAl) it ltne Third Wc-ld FandLi Population gmoh rot-n nor for thr deondesehcding in Surey.1960 and 1970. /7 loe studies haa suggented that crude doat rates of ohtldren

IL Nati ef "der 15 and 65 Ind -or age hrnoketo t ages 0 throa.gh I esy be used aafirst appruulintion indao ofthone tn la1bor force brn-ket of agrs 15 through 61,. slmiiiFA -0 rfere,on tanderds r-pron-t pby-slolagioal on- Peroatage enrol.led of norr-op-;ding population of .b-l agsquilrreoni for --ral octilnty nod henIth, tkldug an cefl-ed fur each oeo-try.

lo 192; 1b 1965-70, -1 oenti.t u; /C 1960-72s Id Pur the def-ntio of urcn,or Dll -g-phic Yva -ku 1972,.I 15; / Ile,Iosad 133 oti3,clIis ,uing ubzsniwconoc rotr tIf6jTTi- ;L Rott o'fPopultio under 05 and 65 and coner to Ltota labor forne; lb 1969; /i -eillcnt ann1l.Et; /J nr,

-.e* .huo on the roostL In of luh-r f-on -prip socvT lO627, Iv 1063, In Ho,ohsldr; 1cl'6,;Per-e: of salaried -roo- erooting noon thu- 2,500 iei; La Peoro-t of saflried ,korisr sorin,g lens than 1,100) lou;bn-?ud-nu sevn sibtncu nurse and ns.ietut eudise; jo Icu -ssdut,ens; /t 1860-by,2 I 1265.73,77 15 yvorsand u/sc; I, 1961; In 1966, I ra ol; 7 Ur ba .drural; /., Pero-entagv of danltl gsu;

eo dtr pipe nsde;7a Pall-rt_es edunutlut;~ /.d baL; uf lito job seekerS tO action popolntlon-

On -eleui-u of tho Feds-a epu,bl,co snn uo c1bjti cvouut-7 Is base.d so Ibe .1n ronn- tien -aiotas.i.e ny t,Intoe uosre,usat sr the routCt ' Ilte Iran Port or Yagoslovus 800,000 wtrivrn, ho work abruad, hoor fond

cl.nvtishtFidor1 happuilc of Gnroany.

A ltbuugh R.inn o In Is the na,ne per oapitu 05P group an fulgosl-at, IiL. baa .teselected oic- the noo?al de,onlopc-tplanuizig policies and poynl1atios Sios ace atolar in both. oroe,bulb cutries have ojor trade ties aith non

H? DOscenher 2, 1p7l,

AN NEX I

IiPORT DETAIL Page 2(rdllion US$)

Av.A. Constant (1972) Prices 1967-69 1972 1973 1974 1975 1976

1. Food 131 207 228 261 250 2502. Other consumer goods 309 296 295 373 370 3703. Petroleum 83 161 182 200 212 225L. Other intermediate goods 1,262 1,875 2,116 2,942 3,11P 3,3065. Capital goods 5h7 689 833 913 977 1,01.6. Total goods c.i.f. 2,332 3,227 3,654 4,689 4,927 5,1967. Non-factor services 299 594 522 602 638 076

8. Total goods and NFS 2,631 3,821 4,176 5,291 5,565 5,872

. Price Indices (1972 = 100)

1. Food 83.9 100 150.6 186.5 186.0 196.02. Other consumer goods 78.9 100 120.5 137.3 152.3 163.63. Petroleum 81.1 100 142.5 455.5 505.5 5L2.54. Other intermediate goods 81.h 100 120.5 137.3 152.3 163.65. Capital goods 78.9 100 120.5 145.6 161.5 173.56. Non-factor services 78.9 100 123.5 154.9 169.6 183.0

C. Current Prices

1. Food 110 207 343 486 465 4902. Other consumer goods 244 296 356 512 563 6053. Petroleum 68 161 259 911 1,072 1,2214. Other intermediate goods 1,027 1,875 2,550 4,039 4,749 5,4095. Capital goods h32 689 1,004 1,330 1,578 1,8136. Total goods 1,880 3,227 4,511 7,278 8,427 9,5387. Non-factor services 236 594 657 932 1,082 1,237

8. Total goods and NFS 2,116 3,821 5,168 8,210 9,509 10,774

November 25, 1974

ANNEX IPage 3

EXPORT DETAIL(million US$)

Av.A. Constant (1972) Prices 1966-69 1972 1973 1974 1975 1976

1. Meat 245 247 193 95 150 2002. Other agricultural products 5L 21 34 0 140 403. Wood 69 83 68 70 71 724. Steel 65 51 74 76 79 815. Copper 37 53 33 33 33 336. Other primary metals 71 82 80 81 83 847. Machinery and equipment 375 544 603 664 717 7748. Fabrics and clothing 203 274 259 279 296 3139. All other goods 597 1,019 918 1,152 1,2L1! 1,3L310. Total goods 1,714 2,237 2,264 2,510 2,712 9,964211. Non-factor services 743 1,188 1,249 1,303 1,381 1,1X64

12. Total goods and NFS 2,457 3,425 3,513 3,813 4,093 4,406

B. Price Indices (1972 = 100)

1. Meat 62.9 100 127.7 140.9 160.4. 169.22. Other agricultural products 83.5 100 150.6 186.5 186.0 195.93. Wood 77.9 100 204.0 218.5 208.3 229.144. Steel 51.3 100 132.0 152.2 165.5 172.25. Copper 120.5 100 168.9 229.0 218.0 221.66. Other primary metals 103.6 100 144.7 205.3 201.0 207.27. Machinery and equipment 78.9 100 120.5 145.6 161.1 173 58. Fabrics and clothing 78.9 100 120.5 137.3 152.3 163.69. All other goods 78.9 100 120.5 155.4 172.h 185.210. Total goods 77.6 100 126.0 144.6 165.L 178.311. Non-factor services 78.9 100 123.8 154.9 1i9.b s.C

C. Current Prices

1. Meat 154 247 247 134 2)14.. 3382. Other agricultural commodities 45 21 52 75 7hi3. Wood 53 83 139 152 l4. Steel 33 51 98 126 1305. Copper 44 53 56 77 736. Other primary metals 74 82 115 167 1667. Machinery and equipment 296 544 727 966 1,155 1,3h18. Fabrics and clothing 160 274 313 383 L5c 51-9. All other goods 471 1,019 1,107 1,790 2,1144 2>,18710. Total goods 1,330 2,237 2,853 3,860 4,582 5,30i11. Non-factor services 586 1,188 1,546 2,019 2,3142 2,679

12. Total goods and NFS 1,916 3,425 4,399 5,879 6,923 ?,983

November 25, 1974

ANNEX I

Page 4

SUMMARY BALANCE OF PAYMENTS(million US$)

Av.1967-69 1972 1973 1974 1975 1970

1. Imports (incl. NFS) 2,116 3,821 5,168 8,210 9,509 10,7242. Expofts (md. NFS) 1,916 3,425 4,399 5,879 6,923 7,9833I Balance of goods and FS 200 -396 -769 -2,331 2,586 -2,7914. Interest -62 -138 -183 -264 -321 -406

a. On public debt -56 -63 -90 -126 -150 -169b. On cther debt -6 -75 -93 -138 -171 -237

5. Workers' remittances 139 889 1,310 1,500 1,673 1,837Other factor services (net) -17 -10 -19 -8 -14 -23

¼'. Current transfers (net) 38 74 87 140 140 1408. Bal.-nce of current account -101 419 164 -963 -1,108 -1,2439. Private direct investment 5 30 50 75 100 13C-0. Official capital grants - - - - -11. Public M & LT loans

a. Disbursements 185 538 400 450 500 600b. Repayments -172 -415 -293 -333 -369 -396c. Net Disbursements 13 123 107 117 131 204

12. Other M & TT (net.)a. Disbursements 229 534 736 874 1,406 1,598b. Repayments -38 -279 -607 -491 -528 -689c. NTet Disbursements 190 255 129 380 877 909

13. IMF Drawings -7 18 - - - _114. Other short term -69 -41 -189 35 -

1';. Use of reserves -33 -804 -561 356 - -

Meno Items

16. Reserves (gross), end period -120 145 689 481 481 48117. Debt service ratio: 1/

-Publ c 11.]. 11.4 6.7 6.2 6.0 5.8Total 14.1 20.0 19.0 14.8 14.2 15.2

18. Extemal debt outstand-ing anddisbursed, end period:

Public 1,191 1,730 1,912 2,029 2,160 2,3614lote-1 1,785 3,552 4,319 4,816 5,824 6,937T'R:D 212 358 430 4095 57l 674

1S. TBRD service as % of:P'ublic debt service 7.6 14.6 9.0 9.6 1o.9 12.7Total debt service 6.4 8.h 3.2 4.0 4.6 4.8

1// On exports (incl. NFS) plus workers' remittances.

FYPFNANovynbher 25, 1974

ANNEX IPage 5

SFLf CTED KFoN(VNIC D_Vi i"V NT DATt

Av. Actuals Projections Growti R?a.eFs As % of GDOYA73. c9t72 1973 1974 1975 1976 1965-70 1970-73 1973-76 As% 1972 1 G 19

National Accounts(average 67.69 prices; million US$)

GDP 10,542 13,)891 14,375 15,450 16,704 17,957 4-7 6.1 7.6 100.0 101.0 101.2Gains from terms of trade 1 -7 -18 -155 -171 -211 - -1.0 -1.2Gross Domestic Income 10,543 13,488 14,357 15,295 16,530 17,746 It.7 6.1 7.3 100.0 100.0 100.0

Imports (incl. NFS) 2,116 3,270 3,377 3,681 4,005 4,500 11.5 6.4 1(.0 24.3 24.1 2:.LExcports (import capacity) 1),18 2,647 2,810 2,977 3,203 3, h69 7.7 8.3 8.5 19.6 19.5 20.2Resource gap 198 623 567 70h 802 911 4.7 4.6 5.1

Consumption 7,628 9,861 10,257 10,953 11,688 12,591 6.2 5.1 7.1 73.1 71.6 71.0Investment (incl. stocks) 3,113 4,246 4,667 5,194 5,825 6,309 4.0 7.J8 10.6 31 5 33.9 35 .6

National Savings 3,013 4,368 4,887 5,279 5,758 6,161 3.0 1].4 8.0 32.4 34.5 3L.7Domestic Savings 2,915 3,623 4,100 4,382 4,842 5,155 1.1 8.9 7.9 26.9 28.4 29.0

Price Indices (1967-69 = 100'Import price index 98.3 122.4 147.0 173.0 203.6 239.7 2.8 9.7 17.7Export price index 98.3 121.6 146.1 163.3 182.6 20L.0 2.8 15.0 11.8Tenns of trade index 100.0 99.3 9?.o 94.4 89.7 85.5 0.0 0.2 -5.2

Public Finance(current prices; million US$)Current receipts 5,206 6,560 7,81Q 9,320 10,628 . 12.5 19.2Current expenditures 8,382 5,521 6,581 7,848 8,982 . 16.3 19.2Budgetary savings 924 1,039 1,238 1,476 1,602 . -1.7 19.2Other public saving - - - - - - -Public sector investment 848 941 1,039 1,223 1,476 1,682 . 1.6 19.2

December 2, 1978

ANNEX' IIPage 1

ThE STATUS OF BANK GROUP OPERATIONS IN YUGOSLAVIA

A. STATEMENT OF BANK LOANS (as at October 31, 1974)

US$ millionAmount (lesscancellations)

Number Year Borrower Purpose Bank Undisbursed

Twelve Loans fullv disbursed 326.2

531 1968 Yugoslav Investment Bank Railways 50.0 2.4654 1970 Yugoslav Investment Bank Industry 18.5 0.1657 1970 Yugoslav Investment Bank Telecommuni- 40.0 5.7

cations678 1970 SFRY Roads 40.0 8.9751 1971 SFRY Roads 35.0 11.5752 1971 Hotel "Bernardin", Piran Tourism 10.0 9.0777 1971 SFRY Multi-purpose 45.0 41.1

Water782 1971 "Babin Kuk" Hotelsko

Turisticki Centar,Dubrovnik Tourism 20.0 17.8

836 1972 Twelve Electric PowerEnterprises in Yugoslavia Power 75.0 b3.4

894 1973 Stopanska Banka, Skopje AgriculturalIndustries 31.0 215.0

916 1973 Naftagas Gas Pipeline 59.4 58.7947 1973 Kikinda Iron Foundry 14.5 11.b965 1974 LIfT Tractor Factory 18.5 17.3966 1974 FOB Iron Foundry 15.0 14.4990* 1974 Bosnia-Herzegovina Road Fund Roads 30.0 30.01012* 1974 Stopanska Banka, Skopje Industrial

Credit 28.0 28.01013* 1974 Privredna Banka Sarajevo Industrial

Credit 22.0 22.01026* 1974 Community of Yugoslav

Railways Railways 93.0 93.u

Total (less cancellation) 971.1 4b2 2 of whlich hias been repaid 103.5

Total now outstanding 867.6Amount sold 7.7

of whichi: Amount repaid 6.1 1.6

Total now held by Bank 866.0

Total undisbursed 462.9

* Not yet effective.

ANNEX IIPage 2

B. STATEMENT OF IFC INVESTMENTS (as at October 31, 1974)

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 Automotive 7.5 2.0 9.5Maribor (TAM)/Klockner- IndustryHumboldt Deutz A.G. (KHD)

1972 FAP-FAMOS Belgrade/Daimler Automotive 12.2 2.7 14.9Benz A.G. Industry

1972 Sava/Semperit Tires 4.0 1.5 5.5

1973 belisce/Bell Pulp and Paper 12.8 - 12.8

1974 Zelezarna Jesenice/ARMCO Special Steel 10.0 - 10.0

1974 Salonit Anhovo Cement Plant 10.0 - 10.0

Total Gross Commitments 61.5 16.2 77.7less cancellations, terminationsrepayment and sales 10.2 2.2 12.4

Total Commitments held by IFC 51.3 14.0 65.3

Total Undisbursed 32.8 5.9 38.7

ANNEX IIPage 3

C. PROJECTS IN EXtECUTION 1/

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

The completion of this project was originally scheduled for 1973but geo-technical and other construction difficulties in mountainous terrainare expected to delay operation of the line at least until 1976. The ClosingDate has been postponed from December 31, 1973 to December 31, 1975.

As a result of inflation and cost overruns, the total project costhas increased from $225.5 million to $290.0 million. There is at present afinancing gap of about $35 million. The Federal Government and the RepublicanGovernments of Serbia and Montenegro have already taken some measures to closethis gap so that financing for all the works to be carried out in 1974, aswell as part of works in 1975, is identified. The necessary financing forthe balance of work to complete the project is expected to be secured in thecourse of 1975.

Loan 654 Industrial Projects - 1970: US$18.5 million Loan of January 1970;Closing Date: July 31, 1974.

All three sub-projects under the loan have been substantially com-pleted. The Closing Date was postponed from June 30 to December 31, 1973,to allow payments of 10 percent retention money under already concluded con-tracts of Crvena Zastava and Sisak, and a second time on December 28, 1973 byseven months to July 31, 1974, to allow final disbursements of guaranteedpayments. The disbursements have been substantially completed and the remain-ing balance is expected to be cancelled.

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

Delays in civil works have occurred which will delay completion ofthe project until late 1975. With the exception of the earth satellite sta-tion, only preliminary works have been completed. A cost overrun for ordersalready placed amounting to US$5.1 million, is expected due to currency reval-uations. Following a revision of the disbursement schedule, disbursementsare now in line with the revised projections.

1/ These notes are designed to inform the Executive Directors regardingthe progress of projects in execution, and in particular to report anyproblems which are being encountered, and the action being taken toremedy them. They should be read in this sense, and with understandingthat they do not purport to present a balanced evaluation of strengthsand weaknesses in project execution.

ANNEX IIPage 4

Loan 678 Fourth Highway: US$40.0 million Loan of May 28, 1970;Closing Date: December 31, 1975

After an initial delay of about one vear in starting work on theSarajevo-Zenica section because of difficulties in acquiring the right-of-way,work on all sections is proceeding satisfactorily and six of the nine sectionshave been substantially completed. However, due to delays on the remainingsections, the Closing Date has been postponed from June 30, 1974 to December31, 1975.

Inflation and the delays in starting construction caused an increaseover the appraisal cost estimate of about 10 percent. On the basis of a re-vised cost estimate of construction work in January 1973 the disbursementpercentage was revised from 43 to 40 percent, effective March 1, 1973. Dis-bursement is proceeding in line with 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 conditionsfor effectiveness of the loan, construction work is now making satisfactoryprogress on all sections. A 10 percent increase in the appraisal cost esti-mate is expected, and the disbursement percentage will be revised on thebasis of more accurate revised cost estimates. Disbursements under the loanare about one year behind the appraisal estimate.

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

There have been delays in implementation of the project due todelays in making the loan effective, appointing consultants, providing thenecessary infrastructure and approvals by local authorities. As a resultdisbursements are behind schedule. Bids received in July 1974 indicate thatthe project, if it were to be implemented as originally envisaged (2,500 beds)would cost approximately 100 percent over the originally estimated cost ofIrSS25.6 million. This increase is mainly due to rapid inflation in construc-tion costs. After discussions with the Bank the project sponsors have proposeda complex containing some 1,616 beds. The total cost would be US$35.8 million,requiring additional financing of about US$10 million. Financing for therevised project has been arranged and, subject to the agreement of the Execu-tive Directors to the Bank continuing to disburse under this loan, construc-tion would start shortly.

Loan 777 Ibar Multipurpose Water: 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, theresponsible agency, the Ibar-Lepenac Enterprise, is now well established andgood 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 laterthan originally planned). Disbursements are proceeding in line with the re-vised schedule.

ANNEX II

Page 5

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

There have been delavs in the implementation of the project due todelays in making the loan effective and in mobilizing consultants. According-ly disbursements are behind schedule. Although these problems have now beenlargely resolved, the prolect is almost two years behind schedule. Bids forcivil works and estimates for other components indicate that the project wouldcost at least twice as much as originally estimated (US$49.9 million). Thisincrease is largelv due to rapid inflation in construction costs. After dis-cussions with the Bank the project sponsors have proposed a complex contain-ing some 2,034 beds. The total cost would be US$51.5 million requiring addi-tional financing of about US$1.6 million. Financing for the revised projecthas been arranged and, subject to the agreement of the Executive Directors tothe Bank continuing to disburse under this loan, construction would startshortly. Provisions for a US$1.6 million contribution to the Dubrovnik W4aterand Wastewater Infrastructure project are included in the financing plan forBabin Kuk.

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

The project execution is about one year behind schedule mainlybecause of coordination difficulties and inherent delays in reaching agree-ment among 12 borrowers. All main contracts have now been awarded and manage-ment consultants are expected to commence work soon to help improve planning,operation and management of the interconnected power system. Disbursementsare proceeding in line with the revised schedule.

On July 10, 1974 an Accession and Amending Agreement was signe:dbetween the Bank and the eleven original borrowers, JUGEL and electric powerenterprise OSIJEK, allowing the latter to become the twelfth borrower.

Loan 894 Agricultural Industries (Macedonia): US$31 million Loan of Hlay 25, '1"973;Closing Date: December 31, 1978.

This loan became effective on November 28, 1973. A recent super-vision mission found continued strong credit demand with many credit appi,-cations already received. Stopanska Banka has already granted numerous smailsubloans and appraisals of several large subloans have been submitted to theBank for approval. Disbursements are on schedule.

Loan 916 Naftagas Pipeline: US$59.4 million Loan of June 25, 1973;Closing Date: June 310, 1977.

This loan became effective on Yiarch 22, 1974, after about foucmonths' delay. Bids received on pipes and equipment exceeded appraisal es-timates and civil works costs have increased so that project costs are nowabout 93 percent above the appraisal estirmate. Additional local finance forcivil works is being arranged but little additional foreign finance for pipes

ANNEX IIPage 6

and equipment is available. Discussions are in progress with the Borrower totrim the project of its less essential items and to revise the implementationschedule for the reduced project.

Loan 947 Kikinda Iron Foundry: US$14.5 million Loan of November 30, 1973;Closing Date: March 31, 1978.

This loan was declared effective on May 28, 1974 after four monthsdelay, which was primarily due to the extra time required for the ratificationof the Guarantee Agreement by the Federal Assembly. The implementation of theproject is proceeding on schedule.

Loan 966 FOB Iron Foundry: US$15.0 million Loan of February 22, 1974;Closing Date: December 31, 1977.

This loan became effective on May 28, 1974, as scheduled. The im-plementation of the project is proceeding on schedule. Disbursements havejust started.

Loan 965 IUlT Tractor: US$18.5 million Loan of February 22, 1974;Closing Date: December 31, 1977.

This loan became effective on June 11, 1974 after two weeks delay.The implementation of the project is proceeding on schedule.

ANNEX IIIPage 1

YUGOSLAVIA: Vodovod D)ubrovnik

Loan and Project Summary

Borrower: "Vodovod Dubrovnik"-Poduzece za Izgradnju i OdrzavanjeVodovoda i Kanalizacije (Vodovod).

Guarantor: Socialist Federal Republic of Yugoslavia.

Amount: US$6.0 million, equivalent, in various currencies.

Terms: Amortization in 24 years, including a 4-year grace period,with interest at 8 percent.

ProjectDescription: The water supply component would comprise the following:

(a) extensions of the Komolac pumping station and installa-tion of two additional pumps, (b) new 1.4 km rising mainfrom the pumping station to the tunnel through Srdj Mount-ain, (c) construction of a 2,000 m3 reservoir at BabinKuk, (d) extensions and renovations of the distributionsystem, (e) acquisition of land and (f) engineering design,supervision and project administration. The wastewatercomponent would comprise: (a) construction of 13.6 km ofnetwork sewers and 8.2 km of collector sewers, (b) modifi-cations to existing sewers, (c) installation of fourautomatically operated pumping stations, (d) constructionof a treatment plant for comminution and removal of float-ables, (e) construction of an outfall sewer south of thecliff face of Petka hill, including 1.3 km of underseapipeline terminating in a diffuser section at a depth of97 m, (f) acquisition of land, (g) engineering design,supervision and project administration and (h) equiprmientfor operation and maintenance of the wastewater systemi.In addition, headquarter's offices and worksnops wouldbe expanded.

ANNEX IIIPage 2

Estimated Cost:US$ 000

Local Foreign Total Percent(of totalProj.cost)

A. Water Supply Component

I. Construction and Equipment:

a. Expansion of Pur,mping Stationat Dubrovnik river 282 109 391

b. Rising "lain frorm PumpingStation to Tunnel 290 110 400

c. Reservoir at Babin Kuk 232 41 273d. Extensions to Distribution

Systerm 248 74 322e. Renovations to Existing

Systems 66 13 79

Sub-Total 1,118 347 1,465 15.4

II. Land 19 - 19 .2

III. Project Design and Supv. 49 3 52 .4

IV. Contingenciesa. Physical 124 36 160b. Price 297 88 385

Sub-Total 421 124 545 5.7

Water Supply TOTAL 1,607 474 L2?13 21.7

ANNEX IIIPage 3

US$ 000Local Foreign Total Percent

(of totalProj.cost)

B. WFastewater Component

I. Construction and Equipment:

a. New Sewer Construction 2,074 311 2,385b. Modifications to Existing

Sewers 361 28 389c. Pumping Stations (4) 601 320 921d. Treatment P'lant 109 48 157e. Outfall Sewer 343 304 647f. Expansion of Vodovod Hqts. 118 13 131g. Operations and Maintenance

Equipment 39 39 78

Sub-Total 3,645 1,063 4,709 49.2

II. Land 55 - 55 .6

III. Project Design and Supv. 154 8 162 1.7

IV. Contingenciesa. Physical 502 139 641b. Price 1,505 418 1,923

Sub-Total 2,007 557 2,564 26.8

Wastewater TOTAL 5,861 1,628 7,489 78.3

TOTAL Project Cost 7,468 2,102 9,570 100Interest During Construction 88 1,171 1,259 N/A

TOTAL Project Financing Required 7,556 3,273 10,829 N/A

Non-project capital expenditures andincreases in net working capital 3,640 - 3,640 N/A

Financing required during the projectperiod 1974-79 11,196 3,273 14,469 N/A

ANNEX IIIPage 4

Financing: (1974-1979 including interest during construction, non-projectexpenditures and increases in net working capital)

Sources US$ 000 Percent

IBRD 6,000 41.5Internal Cash Generation of the Borrower 3,960 27.4Loans from:

Republic of Croatia 685 4.7Dubrovnik Bank 1,357 9.4

Contributions:Babin Kuk 1,639 11.3Other Enterprises and Consumers 315 2.2

Grant from Dubrovnik Commune 498 3.5

14,454 100

Expenditures to be c.i.f. cost of imported equipment, ex-factory costfinanced by the Loan: of locally manufactured equipment, cost of consul-

tants, 35 percent of civil works contracts and in-terest during construction.

EstimatedDisbursements: Calendar Year Amount (US$ million)

Annual Cumulative

1975 1.4 1.41976 2.7 4.11977 1.3 5.41978 0.6 6.0

Procurement: Contracts for the supply and installation of equipmentand for civil works expected to cost more than US$100,000would be put to tender on the basis of international com-petitive bidding in accordance with the Bank Group's"Guidelines for Procurement". A margin of preferencefor local equipment manufacturers of 15 percent orcustoms duty, whichever is lower, would be used forpurposes of bid comparisons. Contracts expected to costless than US$100,000 would be let according to the Bor-rower's usual procurement procedures which are considerecsatisfactory. Vodovod would carry out by force accountminor works such as renovations and modifications to theexisting water and sewer networks. The total value ofsuch minor works is expected to be less than 10 percentof the project cost.

Estimated ProjectCompletion Date: June 30, 1978

Appraisal Report: Report Number: 356a-YUDate: October 9, 1974EtENA Projects Department

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