Document of

The,World Bank

FOR OFFICIAL USE ONLY

Report No. 2102

PROJECT PERFORMANCE AUDIT REPORT

YUGOSLAVIA - IMT EXPANSION PROJECT

(LOAN 965-YU)

June 20, 1978

Operations Evaluation Department

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.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

FOR OFFICIAL USE ONLY

PROJECT PERFORMANCE AUDIT REPORT

YUGOSLAVIA - IMT EXPANSION PROJECT

(LOAN 965-YU)

TABLE OF CONTENTS

Page No.

Preface

Basic Data Sheet

Highlights

PROJECT PERFORMANCE AUDIT MEMORANDUM

I. Introduction and Project Summary 1

II. Overrun in Cost and Its Financing 1 - 2

Overrun on Foreign Currency Cost 2 - 3

Overrun in Local Currency Cost and Its Financing 3 - 4

III. Procurement 4

IV. Production, Marketing and Financial Results 4 - 5

V. Audit Covenant 5 - 6

VI. Conclusions 6 - 7

Annexes: Project Costs and Financing

I.1 Foreign Currency Cost - Estimated and Actual

1.2 Local Currency Cost - Estimated and Actual

1.3 INT - Local Financing Needs and Sources: Appraisal Estimates

1.4 INT - Sources and Uses of Funds, 1973-1975Appraisal and Actual

1.5 IMT - Sources of Internal Funds 1974-1976 (1st. Quarter)

1.6 IMT - Appropriations to Collective Consumption Fund,1974-1976 (1st. Quarter)

II. Currencies Dishursed and Their Dollar Equivalents

III. IMT Tractor Output, 1977

IV. IMT Sales and Service Center Program

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.

-2-

Page No.

Attachment: Project Completion Report

Statistical Summary A.1

Statistical Comparison A.1 - A.2

Summary and Conclusions A.3

I. Project Description and Implementation A.4 - A.6

II. Project Cost, Financing, Procurement andDisbursement A.6 - A 12

III. Project Operation and Prospects A.13 - A.17

IV. The Bank's Role A.17 - A.18

Annexes:

I. Organizational Chart of IMT - Beograd A.19

II. INT - Project Description A.20 - A.21

Chart I A.22

III. Comparison of Actual Implementation Schedulewith Estimates A.23

Analysis of Delays in Civil Works Completion A.24

Analysis of Major Delays in Equipment Procurement A.25

IV. Market - Demand for Tractors - By Size Range A.26

V. Income Statement - Comparison of Actual andAnticipated Performance A.27

Balance Sheet Statements - Comparison of Actual andAnticipated Performance A.28

Working Capital - Comparison of Actual andAnticipated Performance A.29

VI. Financial Rate of Return Calculations -Incremental Financial Costs and Benefits A.30

Financial Rate of Return Calculations

Major Assumptions A.31

VII. Economic Rate of Return CalculationsIncremental Economic Costs and Benefits A.32

Economic Rate of Return CalculationsMajor Assumptions A.33

PROJECT PERFORMANCE AUDIT REPORT

YUGOSLAVIA - IMT EXPANSION PROJECT

(LOAN 965-YU)

PREFACE

This is an audit of performance under Loan 965-YU for US$18.5million, to Industrija Masina i Tractora in Yugoslavia. The loan wasapproved in February 1974 and became effective in June 1974. It wasfully disbursed by December 31, 1977, and an amount of US$1.2 millionhad been repaid, leaving an outstanding of US$17.3 million as at April 28,1978.

An OED mission visited the country and discussed various aspectsof the project with project officials, Government officials and officialsof the Social Accounting Service. This helped update project data andbring out borrower viewpoints on the project. Assistance rendered byproject officials and representatives of the Government and the SocialAccounting Service during the mission is gratefully acknowledged.

The audit memorandum is based on the Project Completion Report(PCR) prepared by the Industrial Projects Department, study of files anddiscussions with Bank staff and during the OED mission. The audit memo-randum discusses mainly the role of the Bank in project formulation andsupervision and issues arising out of the Bank's system of denominationof its loans in one currency. Comments on an earlier draft were receivedfrom the borrower.

PROJECT PERFORMANCE AUDIT REPORT

YUGOSLAVIA - IMT EXPANSION PROJECT

(LOAN 965-YU)

BASIC DATA SHEET

Amounts (in US$ m1n)As of 4/30/78

Original Disbursed Cancelled Repaid Outstanding

Loan 965-YU 18.5 18.5 - 1.2 17.3

Project Data

Actual or Re-estimate

Board Approval 2/19/74

Loan Agreement 2/22/74

Effectiveness 6/11/74

Physioal Completion 12/75 3/76

Loan Closing 6/30/76 12/31/77

Total Costs (mln) US$79.7 US$83.9

Economic Rate of Return 16% 20%

Mission Data

Month, No.of No. ofYear Weeks Persons Manweeks Date of Report

Appraisal 2 parts 6/73 3 2 6 7/26/737/73 4 2 8 8/23/73

Supervision I 12/74 1 x 1/3 1 1/3 - 12/11/74

Supervision II 2/75 1/2 x 1/3 1 1/6 3/14/75

Supervision III 7/75 1 x 1/3 1 1/3 7/28/75

Supervision IV 9/75 1 x 1/3 1 1/3 10/06/75

Supervision V 5/76 2 x 1/3 2 4/3 6/04/76

Supervision VI 11/76 2-1/2 x 1/2 2 5/2 1/15/77

Supervision VII 6/77 1/2 2 1/3 8/16/77

/1 All missions attended to 3 projects simultaneously IMT/FOB/Kikinda exceptlast one (11/76) which only attended to 2 IMT/Kikinda.

PROJECT PERFORMANCE AUDIT REPORT

YUGOSLAVIA - IMT EXPANSION PROJECT

(LOAN 965-YU)

HIGHLIGHTS

The Bank approved in February 1974 a loan for US$18.5 millionto Industrija Masina i Tractora (IMT) to enable it to diversify itsrange of tractor production and increase the production of tractors,accesories and implements more than two-fold. The project was completedin March 1976 with an overrun of 18% in cost in local currency terms(accounted for mostly by changes in the scope of the project and incurrency parities) and an average delay of 3 months. The financial rateof return on the project, reestimated at the completion stage, was lowerthan the estimate at the appraisal stage, and the economic rate ofreturn higher.

Other points of interest are:

- Impact of currency denomination on adequacy of projectfinancing requirements (paras. 2.02-2.06 of the PPAMand paras. 7-9 of the PCR);

- positive role of the Bank in project formulation and super-vision (paras. 6.02 and 6.03 of the PPAM and paras. 26-27of the PCR) and in procurement (para. 3.01 of the PPAMand paras. 12-13 of the PCR).

PROJECT PERFORMANCE AUDIT MEMORANDUM

YUGOSLAVIA - IMT EXPANSION PROJECT

(LOAN 965-YU)

I. Introduction and Project Summary

1.01 In FY73/74, the Bank approved six loans for a total amount ofUS$128.0 million to Yugoslavia: three for US$48 million for industrialexpansion projects, two for US$52 million to regional financial inter-mediaries for on-lending to industry, and one for US$28 million for ahighway project. The three industrial projects were in the same indus-trial sector (engineering-foundry and tractor manufacture), were approvedin quick succession as the first three loans to Yugoslavia in FY73/74,and have just been completed. Completion reports have been prepared ontwo of the projects (Loan 947-YU for US$14.5 million to Kikinda forfoundry expansion and Loan 965-YU for US$18.5 million to IET for tractorexpansion), which latter is the subject of this audit.

1.02 In February 1974, the Board approved a loan of US$18.5 millionto Industrija Masina i Tractora (INT) to enable it to raise its annualproduction of tractors from 15,000 units to 35,000 units with a morediverse horse-power range and to triple its production of accesories andimplements. The cost of the project was estimated at Y Din 1,233.9 million

(US$79.7 million 1/), comprising fixed asset cost of Y Din 853.2 millionand incremental working capital of Y Din 380.7 million. The actual totalcost is now estimated at Y Din 1,004.1 million (US$83.9 million 2/).Individual components of the project were completed at different timesduring 1975 and 1976, with an average estimated delay of 3 months. Theproject went into production smoothly, and in 1977, the first full yearof production, production of tractors amounted to 33,608 units (againstprojected 35,000 units), the shortfall being due mainly to short suppliesof castings and not operational problems with equipment. The financialrate of return on the project on completion is estimated at 12% (against21% estimated at the apiraisal stage), and the economic rate of return at20% (against 16% at appraisal).

II. Overrun in Cost and Its Financing

2.01 The overrun in total capital cost and the reasons thereof areexamined and explained in detail in the project completion report (paras.

7-10 of the PCR). While small proportionately and in absolute amount,

1/ Rate of exchange: US$1 = Y Din 15.5T/ Rate of exchange: US$1 = Y Din 17.6 (weighted average)

- 2 -

the overrun in cost of the Bank's disbursement system for its loans andin respect of the Bank covenant on overrun financing, which are discussedbelow.

Overrun on Foreign Currency Cost

2.02 The Bank loan was intended to meet, in the case of IMT, a partof the cost of imported equipment; of the total foreign currency cost(including contingencies and escalation) of Y Din 355.2 million, the Bankprovided Y Din 285.6 million, "equivalent to about 75% of the equipmentcost" (para. 5.05 and Table in Annex 5-1 of Appraisal Report No. 288-YU).Equipment cost was "derived from actual prices prevailing in 1973 andfrom quotations received in the last quarter of 1972 or first half of 1973from potential European and US suppliers.... In addition, price contingen-cies equivalent to an escalation rate of 6% per annum have been appliedto the cost of foreign equipment including import duties and taxes"(which were taken at the prevailing rates; vide paras. 5.02 and 5.03 andAnnex 5-1 of the Appraisal Report); the price contingency, calculated at6% per annum on equipment cost plus import duties and taxes, worked outto about 7.6% per annum on the cost of imported equipment only.

2.03 Since August 1971 a system of floating exchange rates has pre-vailed, bringing about varying changes in parities between differentcurrencies. One result has been that there have been fluctuations in thevalues of various currencies in relation to the US dollar in which theBank loans are expressed. IMT procured four-fifths of its equipment, invalue terms, from Germany (vide para. 12 of the PCR). More than three-fourths of the amount under the loan to IMT was disbursed during 1975 and1976 (vide para. 14 of the PCR).

2.04 A statement of the foreign currency cost of the project,projected and actual, is given as Annex I.1. This shows that at theexchange rates between the Yugoslav dinar and the currencies of procure-ment, the local currency equivalent of the imported equipment was Y Din 416million (US$23.9 million at the weighted average exchange rate of Y Din 17.6to 1 US$ and US$26.8 million at the constant rate of Y Din 15.5 used atthe appraisal stage). IMT appears to have been able to keep its foreigncurrency expenditure set at the appraisal stage by transferring to localsources a part of the equipment proposed to be imported at the appraisalstage. Such transfer, amounting to about Y Din 21 million (equivalent toabout US$1.2 million at the weighted exchange rate) represents the overrunin the foreign exchange cost in US$ terms.

2.05 The rate of exchange between the US dollar and Deutschemarkduring the period 1974 to 1977 was not stable, and the US dollar depre-ciated in relation to the DM (particularly in 1975 when about half the

loan amount was disbursed under the loan). As a result, the amount underthe Bank loan, as denominated (in US dollars), proved insufficient to meet

the cost of equipment imported under the loan, as actually incurred and

- 3 -

expressed in dollars. In the case of IMT, the PCR (vide Table in para. 9of the PCR) attributes an overrun of Y Din 40 million (about US$2.2 millionequivalent) to changes in exchange rates. Since INT was meeting a partof its foreign exchange requirements from its own resources (para. 2.02above), it would be able to meet its additional needs arising out of thisshortfall by transferring the amount to its self-financing account andobtaining the required foreign exchange against it.

2.06 The Bank had disbursed to IMT, as at December 31, 1977, a totalamount of US$17.94 million equivalent in various currencies, as providedunder Section 2.01 of the Loan Agreement. Under the agreement, IMT isrequired to repay to the Bank in the currencies disbursed. A statementof the currencies and the amounts outstanding as of December 31, 1977,which IMT is obligated to repay under Section 2.08 of the Loan Agreement,is given as Annex II. At the exchange parities prevailing as atDecember end, 1977, in respect of the currencies and amounts disbursedto INT, the US dollar equivalent of the amounts payable by IMT onprincipal account under the Loan Agreement is estimated at US$20.80 million,which compares with US$17.89 million equivalent at the time these currencieswere disbursed.

Overrun in Local Currency Cost and Its Financing

2.07 There was an overrun of Y Din 203.4 million on the local currencycost of the project (Innex 1.2 of this PPAM). The overrun and the reasonsfor it are explained in the PCR (paras. 7-10 and Annex II). In the lightof the changes in the scope of the project and unforeseen inflationaryconditions which prevailed during the period of implementation of theproject, the increase in the local currency cost of the project is notunreasonable.

2.08 Being an operating industrial enterprise, the total financingneeds of IMT, over the: period of implementation of the project, were largerthan those required for the project. Excluding the foreign exchange costto be met from the Bank loan, the total local currency requirements of IMTwere estimated at Y Din 1,252.7 million. These were to be met out of cashfrom operations, and loans from Beogradska Banka and others, as shown inAnnex I. 3 to this PPAM.

2.09 Since funds are fungible, it is not possible to disentangle,from the overall operations of IMT, the actual sources of finance for theproject. Instead, IMT's overall sources and uses of funds are comparedwith appraisal estimates over the period during which the project wasimplemented till 1975-end. The sources and uses statement is given inAnnex I.4. It shows that while the increase in both fixed assets andinventories was larger than estimated at the appraisal stage, this wasfinanced mostly out of increase in equity funds and depreciation provision.Annex 1.5 shows the individual sources of internal funds over the years1974, 1975 and the first quarter of 1976.

2.10 In its Loan Agreement with INT, the Bank had referred in therecital clause to INT's proposal to obtain an undertaking from BeogradskaBanka to provide funds for financing the project in case there was ashortfall in resources in relation to expenditure. As a result of itsmuch larger internal cash generation than that forecast at the appraisalstage, IMT did not have to resort to Beogradska Banka for funds under therecital clause. INT's current ratio at the end of 1976 (accounts for1977 are still to be prepared) was 3.2:1 (vide para. 20 and Annex V ofthe IMT PCR) - within the limit of 1.3:1 provided under Section 5.06 ofthe Loan Agreement.

2.11 Apart from transfer to various reserve funds, enterprises inYugoslavia also allocate a part of their profits to Collective ConsumptionFund which is used to provide for worker housing, vacations and similarworker benefits. Section 5.01 of the Loan Agreement with IMT providesfor restrictions on such transfers to ensure adequate project financingand an acceptable current ratio. Despite the overrun in project cost,IMT's transfers to the Fund were larger than projected (vide Annex 1.6),and can be justified on the basis of its higher profit levels. Given itssound debt:equity and current position, such transfers in no way affectedadversely the financial structure of INT.

III. Procurement

3.01 The Bank had required international competitive bidding proce-dures to be followed for procurement. The PCR (paras. 12-13) describesthe procedures followed and sources of supply, and Section II of thismemorandum refers to some of the problems arising from the Bank's currencydenomination system and the fall in the exchange value of the US dollar.The enterprise complied with the Bank procedures, and the Bank staff playeda substantial and helpful role in explaining the procedures and providingBank decisions on procurement to the project authorities. All recommenda-tions of the Borrower on procurement were found acceptable to the Bank.IMT considered the procedures useful and the role of the Bank staff help-ful to it. The procedures had a long-term institution-building impact onINT in that it proposed following similar techniques for procurement inits future projects (irrespective of Bank financing or introduction ofsimilar covenants).

IV. Production, Marketing and Financial Results

4.01 The IMT expansion project involved the addition of more complexand automated equipment. The consequent labor recruitment and trainingproblems have made for a slower build-up of production (vide para. 15 ofthe PCR). INT's output in 1977 (Annex III of this Memorandum) was lowerthan forecast in the appraisal, as also the estimate at the PCR stage(vide para. 16 of the PCR). This, however, reflected neither production

- 5 -

nor market constraints at INT, but a shortfall in the supply of castingsfrom a major supplier (Fabrika Odlivaka Beograd) whose expansion projecthad come up against delays and which was having problems with building upinitial production.

4.02 The INT expansion project involved a more than doubling of itsoutput, and the Bank, concerned about the marketing of the output, hadrequired IMT "to submit to the Bank by mid-1975 a 5-year program for theexpansion of its local and export marketing and servicing organization".In addition to its existing sales set-up, to strengthen its marketingarrangements, IMT drew up a plan of building 37 sales-cum-service centers(vide Annex IV), of which 11 were already completed by end-1977. Thesecenters follow one of the eight standard designs for the buildings, whichprovide for showroom facilities, store space for spares, service area andspace for a bank. The service staff of the center is given training atIMT. Each center is expected to handle sales of 600 to 900 tractors andrelated implements and accessories per annum. IMT does not participate inthe financing of these centers, except those in remote or competitiveareas where it takes a 50% participation. IMT has export arrangementstnder which its selling agents set up selling and servicing organizationsin conformity with local needs and practices.

4.03 The PCR examines in depth the financial operations of INT (videparas. 20-21 and Annex V of the PCR). INT's operating profit in 1976 was]Lower than projected at the appraisal stage (para. 20 and Annex V of thePCR) mainly because of the operation of price controls on IMT's output.According to preliminary figures for 1977, net sales amounted to Y Din4,470 million and income before taxes Y Din 119.2 million (againstprojected Y Din 3,419 million and Y Din 233.7 million respectively). Finalaudited accounts for 1977 are under preparation.

4.04 INT's financial rate of return is now estimated at 12% against:21% projected. The lower financial return on the project is attributed toprice control on the output of the enterprise, which does not compensateit fully for cost increases. The economic rate of return on the projectis higher than that projected, bedng 20% (against 16% projected), as aresult of increased production efficiency and improved internationalcompetitiveness of IMT's products.

V. Audit Covenant

5.01 Independent external audit is a normal Bank requirement for itsloans. Section 5.02 of the Loan Agreement with INT provided, inter alia,for external audit in the following words:

-6-

The Borrower shall have its accounts and financial state-ments (balance sheets, statements of income and expensesand related statements) for each fiscal year audited, inaccordance with sound auditing principles consistentlyapplied, by the Social Accounting Service or anothercompetent and experienced independent auditing organiza-tion.

5.02 In the case of most borrowers - governments, statutory authorities,corporate entities - provisions for external audit are required under theconstitutional and legal systems of the countries, and the Bank's require-ment generally is satisfied when the independence of the auditing agencyis vouchsafed for and the content and form of audit are appropriate to theBank's needs. Under the law establishing it, the Social Accounting Serviceperforms payment operations in Yugoslavia, monitors operations and analyzesinformation concerning the management of social funds; it also audits themanagement of these funds and controls the fulfillment of the obligationsof enterprises in the country.

5.03 A form of Internal audit system prevails in Yugoslavia, but thereis no legal provision or requirement for external audit of the accounts ofYugoslav enterprises. This perhaps arises from an implicit application ofthe principles of social ownership of means of production and of workersbeing guardians for the efficient use of such resources. The Bank acceptedaudit by the Social Accounting Service as fulfilling its requirement ofexternal audit.

VI. Conclusions

6.01 The project was implemented during a period marked by inflationaryconditions and currency fluctuations. Considering this environment, thecost and time overruns were reasonable, and the project was effectivelyimplemented. There were initial start-up problems which, though greaterthan initially envisaged, can be explained in the context of the largescale of the expansion brought about and the change of technology involvedfor the enterprise. The project is now estimated to have a financial rateof return above 10%, which is satisfactory although lower than forecast.The economic rate of return is much higher, and is above the expected rate.The project helped modernize a segment of the engineering industry inYugoslavia, created additional employment and skills, and helped improvethe competitive ability of the enterprise and productive capacity of its

customers.

6.02 The Bank played a significant role during the preparation and

implementation phase of the project and in procurement. The Yugoslav

system of accounting and its presentation are different, and the Bank staff

- 7 -

played considerable role in guiding the borrower to provide data,particularly annual accounts statements, in the form expected by the Bank.One by-product of the Bank's role in this field is that the University ofZagreb now offers a course on preparation of accounts and cash flowprojections on the U.S. basis, which seeks to familiarize Yugoslav profes-sionals with the style of presentation now used in the Bank.

6.03 The Bank had frequent short supervision missions during theimplementation phase. These missions not only helped in maintaining aclose watch on the progress of the project but helped in clarifying to theborrower Bank procedures and systems and sorting out its problems,particularly in the area of procurement. They helped to bring about aclose rapport between the borrower and the Bank. The borrower wasparticularly appreciative of the guidance it received from the Bank'ssupervision missions during the implementation phase of the project.

6.04 The Bank's role in making a long-term impact on the practicesof the enterprise is mixed. The Bank's appraisal system provided theborrower with a new approach to project formulation and to making long-term projections. The Bank's procurement system brought to the borrowersophisticated techniques of obtaining and assessing bids which theborrower mentioned it would use in its future procurement operations.On the other hand, the covenant on transfer to the Collective ConsumptionFund appeared to be inappropriate and not capable of enforcement. Therewere also problems arising out of changes in currency parities during theimplementation period.

6.05 Overall, the Bank's approach in establishing direct relationswith the borrowing entity was justified, was beneficial to the borrower,and is likely to have a long-term positive impact on its managementpractices.

Operations Evaluation Department

June 20, 1978

PROJECT PERFORMANCE AUDIT REPORT

YUGOSLAVIA - IMT EXPANSION PROJECT

(LOAN 965-YU)

PROJECT COSTS AND FINANCING ANNEX I

ANNEX I.1: FOREIGN CURRENCY COST - ESTIMATED AND ACTUAL

(Currency units in million)of which

Total Bank Financed Actual

$ S SY Oin Equiv. Y Din Eguiv. Y Din Equiv.

Equipment and spares 287.8 18.6 229.5 14.9 374.0 21.5

Contingencies:

Physical 22.7 1.7 22.9 1.5

Price 40.2 2.6 33.2 2.1 21.0 1.2

Total 355.2 22.9 285.6 18.5 395.0 22.7

+ Transfer to LocalResources 21.0 1.2

Total 355.2 22.9 285.6 18.5 416.0 23.9

Sources: Para. 5.01, IHT Appraisal Report No. 288a-YU

Paras. 7-9, PCR.

ANNEX 1.2: LOCAL CURRENCY COST - ESTIMATED AND ACTUAL

(Y Dinar million)

Appraisal Actual Increase

Fixed assets 406.7

Contingencies: Physical 34.5 602.1 111.1

Price 49.8

Total fixed assets 491.0 602.1 111.1

Bagineering, pre-operativeand start-up 7.0 7.0 -

Incremental working capital 380.7 473.0 92.3

Total Local Currency Cost 878.7 1,082.1 203.4

* In addition, IMT was to meet a cost of Y Din 68.5 million equivalent offoreign currency cost out of its own resources (paras. 5.01 and 5.05 of theAppraisal Report).

ANNEX IPage 2

ANNEX 1.3: INT - LOCAL FINANCING NEEDS AND SOURCES:APPRAISAL ESTIMATES

(T Dinar million)

Requirements Sources

Project: Fixes assets 566.5 Cash from operations 506.0

Incremental Loans: Belgrade Bank 714.3working capital 380.7 others 32.4

Others 305.5 1,252.7*

1,252.7

* Adding foreign currency needs and sources of Y Din 286.7 million, total needs andsources were given at Y Din 1,539.4 million (para. 5.05 of Appraisal).

ANNEX 1.4: IMT - SOURCES AND USES OF FUNDS, 1973-1975APPRAISAL AND ACTUAL

(Y Dinar million)Appraisal Actual Appraisal Actual

A. Uses B. Sources

Fixed Assets 771.0 1,111.1 7X:*ty

Current Assets B.L 's-Fund 100.5 j24.9

Others 72.4 146..

Inventory 173.8 437.5 Depreciation 118.1 339.6

Others 46.6 160.6 Longgermd 286.7Bank 86.7 677.9Other Assets 170.8 85.0 Others 418.9

Current Liabtli:ies 165.6 285.6

Total 1,162.2 1,794.2 Total 1,162.2 1,794.2

ANNEX 1.5: IMT - SOURCES OF INTERNAL FUNDS 1974-1976 (1st. Quarter)(T Dinar million)

1974 1975 March 1976 Total

Depreciation: Appr Appraisal 42 76 28 146Actual 110 127 37 274

Business Dev. Fund: Appraisal 41 59 21 121Actual 44 36 9 89

Reserve Fund: Appraisal 5 5 1 11Actual 7 9 3 19

Total: Appraisal 88 140 50 278

Actual 161 172 49 382

* Pro-rated for 3 months, the project being deemed to be completed by March 31, 1976.

ANNEX 1.6: Imr - APPROPRIATIONS TO COLLECTIVE CONSUMPTION FUND,1974-1976 (1st. Quarter)

1974 1975 1976 Total

Appraisal 15.0 15.0 20.0 45.0

Actual 30.2 37.3 37.9 105.4

PROJECT PERFORMANCE AUDIT REPORT ANNEX II

YUGOSLAVIA - IMT EXPANSION PROJECT

(LOAN 965-YU)

ANNEX II: CURRENCIES DISBURSED AND THEIR DOLLAR EQUIVALENTS

$ million $ millionCurrency equivalent Rate of Exchange equivalent

Amount at time of as of as ofCurrency (million) Disbursement Dec. 31, 1977 Dec. 31, 1977

($1 equivalent)

U. S. dollars 5.43 5.43 1.00 5.43

Belgian Francs 4.40 0.11 32.94 0.13

Danish Kroner 0.16 0.03 5.78 0.03

French Francs 0.67 0.14 4.70 0.14

Netherland guilders 0.24 0.87 2.28 0.10

Pounds Sterling 0.02 0.03 0.52 0.03

Finnish Markkaa 0.30 0.08 4.02 0.07

Austraian Schillings 1.94 0.11 15.13 0.13

Swedish Froner 0.83 0.19 4.67 0.18

Deutsche Mark 17.40 6.88 2.11 8.27

Swiss Francs 12.64 4.80 2.01 6.29

Total 17.89 20.80

PROJECT PERFORMANCE AUDIT REPORT ANNEX III

YUGOSLAVIA - IMT EXPANSION PROJECT

(LOAN 9 5-YU)

ANNEX III: IMT TRACTOR OUTPUT, 1977

Description Unit Planned Realized

Tractors Pcs. 35,500 33,608

Sets " 1,500 -

Tulleys " 5,000 4,681

Drawbars " 16,145 9,629

eights "1,000 21

Stabilizers " 1,481 3,788

Scats 31,500 -

Cabs 6,000 904

,Dther accesory 000 din. Din. 537,404 498,74-

Trailers Pcs. 8,600 7,763

Rotavators " 1,203 672

Ploughs " 12,JOn 14,825

Seed drills ",0 997

Cultivators " 2,380 2,296

Dine Harrows 7,000 7,540

Other implements in 000 Din. 404,061 523,391

Spare parts " 135,324 171,572

Scaffoldings " 111,476 137,852

Notocultivators " 300,000 322,655

The total realization (net) refers to:

Tractors 3,260,705 - 77.82%Implements 734,896 - 17.54%Other products 194,633 - 4.64%

The total tractor realization refers to:

IMT-533 tractors 35 HP 26,782 - 79.69%IMT-558 " 55 HP 5,604 - 16.67%IMT-575 " 72 HP 1,217 - 3.62%IMT-585 " 80 HP - -IMT-5200 " (over 100 HP) 5 - 0.02%

PROJECT PERFORMANCE AUDIT REPORT ANNEX IVPage--1

YUGOSLAVIA - IMT EXPANSTON PROJECT

(LOAN 965-YU)

ANNEX IV: IMT SALES AND SERVICE CENTER PROGRAM

Typeand

Item Place Area sq.m. Stage of Constructions

1. Sr Makedonija

1.1 Skopje T-4 500 finished

1.2 Stip T-4 500 under construction

1.3 Bitolj T-4 500 preparation for construction

2. Sap Kosovo

2.1 Lipljan T-4 500 under construction

2.2 Pee T-4 500 preparation for construction

3. Sr Srbija

3.1 Bujanovac T-4 500 preparation for construction

3.2 Lebane T-4 500 under construction

3.3 Pirot T-4 500 preparation for construction

3.4 Knjazevac T-4 500 preparation for construction

3.5 Negotin T-4 500 preparation for construction

3.6 Doljevac T-4 500 finished

3.7 Aleksinac T-4 500 preparation for construction

3.8 Krusevac T-4 500 finished

3.9 Knic T-4 500 preparation for construction

3.10 Svetozarevo T-6 670 start of construction

3.11 Raca Kragujevacka T-4 500 finished

3.12 Topola T-4 500 final stage

3.13 Smederevo T-4 500 final stage

3.14 Koceljevo T-4 500 preparation for construction

3.15 Bogatic T-4 500 preparation for construction

3.16 Mionica T-4 500 preparation for construction

3.17 Obrenovac T-4 500 preparation for construction

3.18 Dobanovci T-6 670 preparation for construction

3.19 Uz.Pozega T-4 500 finished

3.20 Bor T-1 330 finished

ANNEX IVPage 2

Typeand

Item Place Area sq m Stage of Construction

4. Sr Bosna I Hercegovina

4.1 Bihac T-4 500 finished

4.2 Banja Luka T-4 500 finished

4.3 Bjeljina T-4 500 preparation for construction

4.4 Doboj T-4 500 preparation for construction

5. Sr Slovenija

5.1 Novo Mesto T-6 670 preparation for construction

5.2 Zalec T-4 500 preparation for construction

6. Sr Hrvatska

6.1 Vinkovci T-4 500 finished

6.2 Virovitica T-4 500 preparation for construction

6.3 Cakovec T-4 500 preparation for construction

6.4 Dubrava T-4 500 finished

6.5 Slav. Pozega T-6 670 under construction

7. Sr Crna Gora

7.1 Titograd T-4 500 finished

Summary Data

Preparation for construction 19

Start of construction 1

Under construction 4

Final stage 2

Finished 11

Total 37

PROJECT COMPLETION REPORT

YUGOSLAVIA - IMT EXPANSION PROJECT

(LOAN 965-YU)

STATISTICAL SUMMARY

AsIC DATA

Borrower Indutrija Masina i Traktoraouaiantor Socialist Federal Republic of yugoalavia

Loan Amount U3*18.5 millionGrace Period 3 yearsRepayment PerLod 14 years (including grace period)Interest Rate Charge 7-IM 'Commitment Charge 3A of 1% per annumuarantee Fee 1-3AMaturities August 15, 1977 to February 15, 1988

Disbursed US$18.0 million (January 31, 1977)

Date of Loan Agreement February 22, 1974Effeotive Date February 22, 1974Closing Date September 30, 1977

Exohange Rate Appraisal, January 1974 - US$1 - 15.50 dinersDecember 1976 - US$1 - 18.2 dinarsWeighited average - UM$ - 17.6 din&"s

Appraisal Rejart No. 288a-YU dated January 28, 19714

Fiscal Tear 12 months ending December 31

STATISTICAL COKPARISONa~~~ppraisal Rpr

So ctual Variance RemarksCapialCt

ZMressed i US$ Millions 55.1 57.1 4% ) on an agrregate basis, the cot overExWressed in Dinar M(illions 853.0 1,,0014.0 18% )(primarily in civil worics and equipment),Foreign Exchange component (US3$ Millioni) 22.9 2g.7 (0%) )resulted fromsLocal Currency Component (Dinar Millio=s) 498.0 605.o 21% ) Additional Scopes 4&0%

3quipment Price Increases: 38%WorkinA C15i a9 Devaluation of 1nar 22(

Expressed in US$ Millions 2(4.6 26.8

Fbu22, 1976 nenoy ed

Z3Wressed In DinAr Millions 380.7 473.0 2%than anticipated at appraisal

JIBEgeu (Diner Milli2

IDt*l%al CSp 3007rtion 506 792 56%IAa.R.D. LJon 287 326 1 U % -D9e to de luationBelgrade Bank Loan/OtherS US31 1 d

Tota -I,T;W20%

Beginni of Construction 1.1.73 1.1.238Project Capletion 12.31.75 3.31276 3 months) Min reasons for delaysCumulative Disbursements 1974 8.3 1.9 (6.4) O() Seismic onge reclassification

(rese a Millions1975 18.5 14.7 (3.8) '_(ii) Increased scope1976 18.5 17.8 (0.7) om( () Changes in import regulations1977 18.5 18.5 (iv) Delay in delivery of doAedtic

equipment (6-1 4 months)

S axling working Capital and Interest d.aring coDtruetion.

- A.2 -

STATISTIC& COMPARISON (Continued)

AppraisalEstLmrate kctual Variance Remarks

Physical Parameters

Construoted Area (m2) 40,000 70,000 75% --- To allow for later expansion of capacity.Capaeity (tractors) 35,000 35,000 -

Performance Parameters

Projected Production (units)

1976 29,500 27,000 (9)----2 month delay in completion of tractor1977 35,000 36,000 3% shop; also change in product mix.

Financial (Dinar Millions 1976)

Revenues 3,0 6 3,051 - ---- Substantial decline in real terms due toCost of Goods Sold 2, 410 2,380 (L&%) strict Government price controls andNet Profit 129 119 (8%) lower WblumeLong-term Debt 903 1,529 69% --- Partially due to devaluation and partiallyEquity 806 1,177 46% to support increased working capital needs.Current Ratio 2.61 2.81 -Debt/Equity Ratio 53,47 56t44 -

Rate of Return

Financial 21% 12% (43%)----Lower revenues due to strict price controls.Economic 16% 20% 25% ---- Increased economic benefits.

- A.3 -

YUGOSLAVIA

IMT EXPANSION PROJECT COMPLETION REPORT

SUMMARY AND CONCLUSIONS

1. At appraisal the IMT Expansion Project involved the expansionand renovation of existing facilities, enabling Industrija Masina i Traktora(IMT) to more than double its production of tractors and implements to alevel fo 35,000 tractors, 27,000 implements and a proportionate number ofspares and accessories. The project was well designed, and was managed effi-ciently without any foreign assistance. Project completion was delayed byonly three months despite several unforeseen difficulties. The cost over-run on fixed assets as calculated in US dollars, amounted to only 4% of theappraisal estimate. In view of some changes in project scope and higherthan anticipated inflation, the small overrun is fully acceptable and re-flects the capability of the management and efficient implementation ofthe project.

2. The financial position of IMT is sound. However, the financialperformance results are less favorable than those forecast at appraisal,the estimated financial rate of return dropping from around 21% to 12%.This decline is primarily attributable to the imposition of strict Govern-ment price control on IMT's products, which resulted in price increaseslagging behind cost increases.

3. The Yugoslav economy is benefitting from the increased local pro-duction of tractors and implements, at internationally competitive prices atIMT's facilities. The economic rate of return is currently estimated at 20%against 16% at appraisal due to the improved international competitivenessof IMT's products. Additionally, local production results in considerableforeign exchange earnings (US$30 million in 1976) and savings (estimated atUS$6O million annually), and is a significant factor towards the mechaniza-tion of Yugoslav agriculture.

- A.4 -

I. PROJECT DESCRIPTION AND IMPLEMENTATION

The Company

1. Industrija Masina i Traktora (IMT) is one of the 50 largest enter-prises in Yugoslav and was established in 1947 to produce pipes, tubes andbolts. The company began manufacture of tractors under a Massey-Ferguson(UK) licence in 1955 and subsequently, in 1968, discontinued its licenceagreement and introduced its own line of tractors, accessories and imple-ments similar to the licensed designs. Its tractor production in 1972 wasaround 15,000 units. IMT is managed by its workers. The Workers' Councilelects the Managing Director and the top management staff for a four-yearterm, and formulates general policy. In practice, the management makes allmajor decisions and has the full cooperation of the Council. Key managementpersonnel associated with the Project were reelected for a second term re-flecting the Council's confidence in them. IMT had four subsidiaries atappraisal. Within the trend of decentralization and increased reliance on"self-management systems" IMT's subsidiaries have since increased to eight,five of which are producing entities and the remainder, service organiza-tions. For a detailed organization chart, see Annex I.

Project Objectives and Design

2. The project was designed to more than double the capacity of IMT'sBelgrade factory to an annual production volume of 35,000 tractors, 27,000implements and a proportionate number of spares and accessories. In addition,the capacity for large tractors (above 100 hp) has also been increased by 500units as a result of the expansion. A further objective was to improve thematerial flow through the provision of sufficient storage areas and therationalization of internal transport systems.

3. IMT's plan was to carry out its expansion program in two phases.Phase I of the program comprised the project and includes the followingmajor investments (details in Annex II).

2(a) construction of a new tracior parts machine shop (21,808 m )

with an additional 5,400 m of auxiliary floor area;

2(b) construction of a tractor 2ssembly plant (16,200 m )

with an additional 4,500 m of auxiliary floor area;

(c) construction of a front and side annex (5,480 m 2) foradministrative use;

(d) reorganization and rehabilitation of the existing tractorproduction and assembly plant into a main implementproduction and assembly area;

(e) construction of access roads and storage areas foroxygen, fuel and lubricants and raw materials; and

- A.5 -

(f) installation of other auxiliary facilities includingelectronic data processing and laboratory equipment,and a compressor station.

Project Completion

4. The project was completed three months behind the appraisalschedule, though individual components were delayed by longer periods asshown below and detailed in Annex III. These delays caused some problemsat start-up, contributing to slower achievement of full capacity operations.

IMT: Implementation Schedule

Component Appraisal Actual

Tractor Parts Production Plant 12/75 3/76

Tractor Assembly Plant 9/75 3/76

Front Annex-Electronic DataProcessing Center 12/75 7/75

Stores 10/74 9/75

Utilities a 12/75 5/76

a/ Jointly executed with the FOB foundry and other civilentities. Late completion did not affect operations.

5. The delays resulted from the following unantifipated difficulties(Annex III).

(a) Changes in import regulations resulted in problems with proceduresfor Bank-financed equipment. Resolution of these problems causeddelays in the procurement of foreign equipment. Though the crucialequipment had arrived by early 1976, other equipment valued atUS$0.8 million was delayed beyond October 1976;

(b) The seismic zone classification of the area was revised, necessitat-ing redesign of civil works;

(c) The scope of the constructed areas (for production facilities, 2offices and 2overed storage) was substantially increased from 36,091 mto 105,685 m (vide para. 2 above and items 2, 3 and 4 under Annex IIto this PCR) in the detailed design of civil works; and

(d) Some local suppliers were over-extended, and faced difficulties inimporting components, delaying delivery of,locally procured equip-ment by 6 to 14 months.

- A.6 -

Project Management

6. The expansion project was implemented under efficient management

without any foreign assistance whatsoever. A local organization assistedin procurement matters. A highly qualified Engineer with many years of

experience served as project manager under appropriate delegation of author-ity by the Managing Director of IMT. The direct project management staffwas relatively small and comprised 30 professionals, primarily engineers,assisted as necessary, by experts in other IMT departments. The cohesive-ness of the project management team helped towards the successful implementa-tion of the project.

II. PROJECT COST. FINANCING, PROCUREMENT AND DISBURSEMENT

Project Cost

7. The appraisal report estimated the total project cost, excludingworking capital, as US$55.1 million. The actual project cost, based on theaverage foreign exchange rate during implementation is U$57.1 million. On thebasis of the exchange rate prevalent at the time of preparation of thisreport, the cost is US$56.3 million. The total overrun calculated in foreignexchange equivalent is thus US$1.2-US$2.0 milion or only 3%-4% higher than theappraisal estimated. Expressed in local currency, the overrun is higherin view of a 14.9% devaluation in the local currency, relative to the dollar,during implementation. Additionally, around 79% of the imported machines wereprocured from Germany (para. 12), and the Deutsche Mark revalued even relativeto the US$ during project implementation further contributing to the overrun.The comparison of actual capital cost with the appraisal estimate is summarizedin the following table:

- A.7 -

IMT: Summary of Project Cost

Din Million 1/ Variance US$ Million 1/ VarianceAppraisal 2/ Actual 3/ % Appraisal 2/ Actual 3/ %

Civil Construction 208.0 309.0 48 13.5 17.6 30

Equipment & Spares 459.0 536.0 17 29.6 30.5 3

Erection & Installation 20.0 19.8 - 1.3 1.1 (15)

Transport & Insurance 33.2 33.2 - 2.1 1.9 (10)

Duty and Taxes 125.0 99.1 (21) 8.0 5.6 (30)

Engineering, Pre-operatingStart-up Expenses 8.0 7.0 (12) 0.6 0.4 (27)

Total Fixed Assets 853.2 1,004.1 18 55.1 57.1 4

Incremental WorkingCapital 380.7 473.0 24.0 24.6 26.8 9.0

Total Capital Cost 4/ l233.9 1,477.1 20.0 79.7 83.9 5.5

1/ An average estimated foreign exchange rate during the implementationperiod of US$1-Din 17.6 was assumed. Rate of exchange during appraisalWLs US$1-Din 15.5. Present rate of exchange is US$1-Din 18.1.

2/ Original cost projections adjusted by adding to each category Physicaland Price Contingencies.

3/ Estimate - minor changes could occur.

4/ Not including interest during construction.

8. The variance between the appraisal estimates and actual cost offixed assets resulted from three factors: scope changes, price increaseshigher than anticipated and currency devaluation. These are summarizedbelow for the major components of the project.

- A.8 -

IMT: Variance in Cost Estimates(Expressed as % of local currency appraisal estimate)

Appraisal ------------------ Variance % ----------------Estimate Variance Change Price Currency Total(Dinar Mil) Dinar Mil in Scope Increases Devaluation Variance

Civil Works 208.0 101.0 34% 14% - 48%

Equipment 459.0 77.0 - 8% 9% 17%

of which: local 104.0 37.0 21% 15% - 36%

foreign 355.0 40.0 (6%) 6% 12% 12%

Total 667.0 178.0 11% 10% 6% 27%

2 The scope c anges relate to an increase in constructed area from

40,000 m to 70,000 m , stronger foundations required due to the revisionof seismic zone classification and transfer of some machines originallyearmarked for foreign procurement to local procurement (particularly machinesidentified for procurement from clearing currency areas). The price increasefactor resulted from a higher rate of inflation than forecast - local infla-tion between 1973-75 averaged 20% against an appraisal estimate of 6-10%.

9. The further breakdown of capital cost overruns is shown below:

- A.9 -

IMT: Breakdown of Capital Cost Overruns

(Dinar Millions)Overruns

Unforeseenand a/

Cost Additional Price

Category Appraisal Actual Sub-Category Scope Increases

Civil Construction 208.0 309.0 Front Annex 2.0 2.0

Assembly Line 12.0 5.0

Parts Production 6.0 11.0

Power Supply 6.0 5.0

Additional MaterialsStorage 15.0 1.0

Workshop, Laboratoriesand Other Buildings 30.0 6.0

Total 71.0 30.0

Local Equipment 104.0 141.0 Additional Equipment 21.0 -procured locallyinstead of abroad

Equipment Price - 16.0Total 21.0 16.0

Foreign Equipment 355.0 395.0 Change in Exchange 40.0

Rate

Equipment Price - 21.0Increase

Transfer to local -21.0 __

Total -21.0 61.0

Other Expenses

Engineering Pre- 8.0 7.0operating Expenses

Erection & Installation 20.0 19.8

Transport & Insurance 33.2 33.2

Duties and Taxes 125.0 99.1

Total 853.2 1,004.1

a/ Over and above the price contingency assumed in the appraisal report.

The data include price increases because of the devaluation of the dinar.

- A.10 -

10. The analysis of working capital increases (detailed for the

total operation in Annex VI) is presented below. The increases can be

partially explained in view of the expanded operation and a larger sales

network; also, the appraisal estimates were low for most categories. Thelarge increase in accounts receivable is largely attributable to the inclu-sion of advance payments on machinery yet to be delivered. The largerinventories in raw materials and work-in-process, to some extent, reflectan expanded operation with a greater diversity of products. The increasein the finished goods inventory is reasonable in view of the expanded salesand service network, requiring increased stock of equipment and spares.

IMT: Working Capital Analysis(Dinar Millions)

Expressed as daysAppraisal Actual As % of of Relevant Income

Item Estimate'76 '76 Increase Total Increase Statement Category

Appr. Actual

Current AssetsCash 60.0 92.7 32.7 5.3 - -

Accounts Receivable 256.0 373.0 117.0 18.8 30 45

Inventory

Raw Materials 436.6 647.8 211.2 34.0 72 110

Work in Process 108.3 164.2 55.9 9.0 15 23

Finished Goods 67.8 285.5 217.7 35.0 9.5 37

Current Liabilities

Accounts Payable 242.5 255.5 (13.0) ( 2.1) 30 28

Working Capital 686.2 1,307.7 621.5 100.0

Attributable to 1/

Project 380.7 473.0 92.3

1/ The working capital increase is attributable to sales increases for (i)existing operations in view of inflation and (ii) the expansion project.The amount for (ii), was determined as US$473.0 million.

- A.11 -

ProJect Financing

11. An exact comparison between anticipated and actual financingis difficult because of accounting changes and due to the problem ofallocating local funds between existing operations and the project. Onthe basis of prorated estimates, overrun financing was generally providedthrough increased internal cash generation as shown below. Although thetable below shows lower than anticipated loans from the Belgrade andother Banks for the project, actual loans to IMT were much higher and wereused to finance working capital needs other than for the project.

IMT:: Comparison of Financing Plans

Dinar Millions US$ MillionsAp)raisal Actual Variance Appraisal Actual Variance

IBRD Loan 287 326 14% 18.5 18.5 -

Internal CashGeneration 506 792 56% 32.6 45.0 38%

Belgrade Bank andother loans 441 359 (19%) 28.5 20.4 (28%)

Total Project Cost 1/ 1,234 1,477 20% 79.6 83.9 5%

I/ Excluding interest during construction.

Procurement and Loan Disbursement

12. The procurement of imported equipment did not meet with any majordifficulties except for some import restrictions due to revised regulations,and is complete but for equipment valued at US$0.1 million. Some delays werecaused by problems in processing import licenses. Most of the internationallybid equipment was procured in Germany following receipt of an average ofaround four bids per package. Of the five largest packages, three were pro-cured in Germany, one in France and one in the US. Procurement by country,is summarized below.

- A.12 -

IMT: Procurement Summary of Internationally Bid Equipment

(Percentages according to value)

Country Percentage

Germany ... 78.5

us ... 6.3

France ... 5.7

Switzerland ... 3.7

Others ... 5.8

Total ... 100.0%

13. The procurement of some local equipment, primarily 15 specialpurpose machines, was delayed by 6 - 14 months due to the local suppliersbeing over-extended and unable to obtain imported components in time.Since these machines have not been delivered, IMT is currently usinglabor intensive general purpose machines, as a substitute.

14. The disbursement of the Bank loan was slower than forecast atappraisal. Actual experience is shown below:

IMT: Disbursement Experience(US$ Millions)

Disbursement Cumulative DisbursementYear Quarter Appraisal Actual Appraisal Actual

1974 1, II 2.7 - 2.7 -III, IV 5.6 1.9 8.3 1.9

1975 1, II 9.0 1.6 17.3 3.5III, IV 1.2 11.2 18.5 14.7

1976 I, II - 2.6 18.5 17.3III, IV - 0.5 18.5 17.8

1977 I - IV - 0.7 18.5 18.5

The appraisal schedule assumed full disbursement by the time of mechanicalcompletion and was thus too tight, and did not make any allowance for guarantee

payments. Delays were also caused by: the factors mentioned above; delayedorder placement as a result of early delays in civil construction; and a

system of down payment with the remainder due on delivery and after performance

tests as against the expectation of progress payments, used as a basis forappraisal estimates. Delayed order placement did not result in operational

delays as the delivery period was shorter than anticipated, but for a few

exceptions.

- A.13 -

III. PROJECT OPERATION AND PROSPECTS

Production

15. The start-up of the new facilities and equipment encountered moredifficulties than foreseen at appraisal. While the Bank appraisal reportestimated production of 29,500 tractors for 1976, actual production wasaround 27,000 tractors. The problem related primarily to difficulties inthe supply of engine castings. The supplying foundry, FOB, is currentlyundergoing modernization. IMT expects to produce 36,000 tractors in 1977,if the FOB foundry is able to provide sufficient castings. The modernizationof FOB is expected to be completed by the end of 1977.

16. Although IMT had planned to begin production of 20-25 hp. tractors,the program has been deferred as production cost for this range would not bemuch lower than for its 35 hp. tractors. There were other changes in theproduct mix also; the ccmpany increased its production of implements from8,600 units in 1973 to 30,000 in 1976, while the appraisal report estimateda level of only 22,000 units. The production of accessories fell behindschedule, increasing from 18,000 units in 1973 to around 20,000 in 1976,against the appraisal estimate of 40,000 units. It is expected that pro-duction will reach 40,000 units in 1977.

The Market and Demand for IMT Products

17. Present Yugoslav market projections (details in Annex V) showan average total requirement - local and exports - of tractors of 46,200units (41,500 during appraisal) for 1977. The net demand for locally pro-duced tractors is estimated at 41,200, since imports from East Europe areexpected to stabilize at 5,000 units in view of Yugoslavia's special traderelations with these countries. IMT informed the Bank of the possibilitythat by 1979, the local production capacity would be in excess of projecteddemand, with four tractor plants, with a combined capacity of 60,000 units(70,000, accounting for IMT's phase II expansion) in operation. Consequently,if the new plants, now at the planning stage, are installed, IMT is likelyto meet strong competition from other local manufacturers.

18. IMT's tractors are fully competitive with West European importsover much of its product range. In the higher horsepower range the pricesare similar but IMT products are sold locally at a lower price due to customsduties and import taxes of 20-25% for such imports. Though priced higherthan East European imports, IMT's products remain competitive due to superiorquality and better availability of spares and after sales service. Supportedby increased production capacity following the expansion, IMT's contributionto local supply increased significantly as shown below:

- A.14 -

IMT: Supply and Demand of Tractors in Yugoslavia

1973 % 1974 % 1975 % 1976 %(Estimate)

Local Production 19,367 64 21,736 64 25,215 63 33,530 73

Imports 10,794 36 12,083 36 14,575 37 12,360 27

Total Supply 30,161 100 33,819 100 39,790 100 45,890 100

Export 1,355 5 2,066 7 2,323 6 6,000 13

Local Sales 28,806 95 31,753 93 37,467 94 39,890 87

IMT Sales 15,973 53 17,717 52 20,100 51 27,000 61

IMT Market Share 55% 56% 54% 68%

(% of local sales)

In order to further strengthen its market position, IMT has improved andexpanded its sales service and started sales agencies, jointly owned byIMT and Rapid, a company specializing in marketing. The company has alsoextended its product range into higher horsepower models, currently imported,for use in the social sector. In the area of implements, IMT has a significantcompetitive advantage over the (around 20) other local manufacturers ofimplements, as these are most often sold with the tractors and can be servicedat IMT tractor stations.

Credit Availability

19. Much thought was given to the issue of availability of credit duringappraisal. However, the tractor market has been a seller's market particularlywith respect to IMT's lower horsepower models. Credit, therefore, has beenmade available only to purchasers of larger horsepower products - with termsof 3 years for 50% of the price to private purchasers, and 5 years and 80%to the social sector. No difficulties are foreseen for future cash sales ofthe smaller models but if necessary IMT will be able to make appropriatearrangements with local banks.

Financial Analysis

20. IMT's financial performance and status for 1976 and as projectedfor 1977 is summarized in the following table, in comparison to appraisalestimates. In current terms, revenues were higher than appraisal estimatesin 1976. However, after discounting for higher than anticipated inflation,this signifies 14% lower sales than estimated. Further the effect of controlson product prices is evident in both years with the variance in operatingcosts being higher (by around 4%) than that in revenues. This results in asignificant decrease in profits. Detailed financial statements are presentedin Annex V.

- A.15 -

IMT: Main Financial Indicators(Current Million Dinars)

1976 1977Appraisal Actual Variance Appraisal Current Variance

Estimate %

Income Statement

Total Revenue 3,046 3,322 9 3,419 4,730 38Cost of Goods Sold 2,410 2,730 13 2,661 3,790 42Gross Profit 636 591 (7) 758 940 24Operating Expenses 368 448 22 392 557 42Operating Profit 268 144 (46) 366 384 5

Ratios

Cost of Goods/Revenues 79% 82% 78% 80%Operating Profit/Revenues 8.8% 4.3% 10.7% 8.1%

Balance Sheet

Net Fixed Assets 735 1,113 51 636 1,117 75Working Capital 686 1,308 90 726 1,597 119Long Term Debt 903 1,349 49 802 1,685 110Equity Funds 806 1,221 51 1,038 1,361 31

Ratios

Current Ratio 2.6:1 3.2:1 2.9:1 2.4:1Debt/Equity Ratio 53:47 53:47 44:56 55:45

GMP1 Deflator 1.26 1.60 27 1.34 1.76 31

I/ Gross Material Product, comparable to GNP.

21. The financial position of IMT continues to be sound, though sub-stantially different in amounts from appraisal estimates. The differencesresulted from devaluation of the currency (and corresponding revaluationof assets and foreign debt), lower profits and increased working capitalneeds. The debt/equity ratio, in 1976, has remained in line with the apprai-sal estimate of 53:47, but for 1977 is projected to be higher than estimated.The current ratio, though higher than estimated for 1976 is projected tofall slightly below the appraisal estimates for 1977. The appraisal reportpointed out the sensitivity of the financial rate of return to changes inprices and operating costs. In line with appraisal projections, the finan-cial rate of return is estimated to drop from 21% to 12% (as shown below)due to the operating costs rising faster than prices, increases in whichlagged behind cost increases due to Government control. Detailed financialrate of return calculations are presented in Annex VI.

- A.16 -

IMT: Financial Rate of Return

Appraisal Current

Base 21 12

Price Decrease 10% (1.6) (4.4)

Operating Cost Increase 10% 3.1 5.1

Economic Impact

22. As anticipated at appraisal, the local production of tractors andimplements at internationally competitive prices has stimulated the mechaniza-tion of agriculture, thus helping farm incomes. As measured in tractor horse-power per cultivated hectare, mechanization increased from 0.45 in 1972 to0.86 in 1975. Similarly, the tractor fleet increased from 120,000 to around225,000. The project contributed significantly to these increases. Datafor 1976 are not yet available but are expected to show further progress.Furthermore, local production has helped standardize tractors and implementsby preventing proliferation of imported makes, and has promoted a number of

backward and forward linkages. Almost all raw materials and parts for produc-tion are supplied locally. At the other end, mechanization of agriculture hasprompted the establishment of a number of sales and service centers, including

some by IMT itself. Consequently, besides direct employment of 1,400 persons,the project investment has created investment in the raw material supply,

foundry, sales and service industries.

23. The economic rate of return of the project has increased to 20%

compared to 16% at appraisal (details in Annex VII). The increase hasresulted from the improved international competitiveness of IMT's products,through increased production efficiency and the devaluation of the Dinar.The foreign exchange earnings from the project are estimated to amount toaround US$30 million through export sales in 1976 with foreign exchange

savings of around US$60 million annually.

Environmental Impact and Safety Considerations

24. In order to conform with the strict Government regulations onenvironmental pollution control, IMT has installed chip-collection mechanisms,

water filtering units for sewage water, and significantly improved ventila-tion in the tractor parts production and assembly shops. Overcrowded workconditions and their safety implications were especially addressed duringappraisal. The number of accidents has decreased substantially since thestart of operations in the new shop, man-hour losses decreasing by around20% between 1975 and 1976.

- A.17 -

Future Development Plans

25. In order to fully integrate its production, IMT is consideringthe establishment of a diesel tractor engine plant with an estimated 1979-80 investment requirement. of US$40 million. Other possible investmentsinclude: expansion of tractor production capacity by 10,000 units (US$6million); expansion of motor cultivator and implement capacity at Kryazevacand modernization of its foundry (US$22 million); and an investment in im-proved working conditions (US$9 million). According to the loan covenantsIMT is required to exchange views with the Bank before undertaking suchinvestments.

IV. THE BANK'S ROLE

Project Formulation and Supervision

26. As the expansion project as submitted to the Bank was well conceivedand designed, the Bank's role in the project formulation stage was limited.The Bank did caution IMT against excessive investment in automatic machinesand such investment was consequently curtailed. The Bank has, however, playedan important role in the implementation of the project. Frequent shortsupervision missions have been very effective in assisting the company toexpedite project completion in the face of several unforeseen difficulties.The supervision effort has been particularly useful in overcoming procurementproblems related to the procedural aspects of international competitivebidding, and to the time required for processing import licenses by localauthorities. In respect to the latter, delays were reduced and the processingtime shortened considerably as a result of the efforts of supervision missionsin directly contacting the concerned Government agencies, when in the field.Additionally, the Bank's effort helped focus attention of IMT management oncritical areas such as f:Lnancial management.

27. The Bank's requirement in the IMT and other loan agreements inYugoslavia, that financial statements be periodically audited a! (contraryto general Yugoslav practice), is a significant step towards improved financialmanagement.

Compliance with Covenants

28.. Overall, IMT was in compliance with all but two covenants:(i) the audited statemenzs were not submitted within six months of theclose of each fiscal yeai:, as required. The delay was caused not byIMT but by the fact that financial statements are not generally audited a/in Yugoslavia, and the Social Accounting Service required some time to setup an auditing unit and prepare the required statements. The first audited

a/ "Audited" refers to the comprehensive process as understood in the

US and other countries. The normal Yugoslav procedure is differentand less thorough.

- A.18 -

statement for 1975 was prepared and submitted in early 1977; the reportfor 1976 is expected to be submitted on schedule; and (ii) a program forthe financing of sales was not submitted by June 30, 1975, as required.Since the availability of credit presented no difficulties at all, thefinancing program was not considered essential and this violation hadno impact on the project.

Lessons to be learned

29. The successful completion of the IMT project almost within costestimates, despite the adverse impact of the oil crisis in 1973, confirmsthe value of certain critical conditions:

(i) a well conceived and designed project;

(ii) an experienced and well qualified project managersupported by a competent, not necessarily large,project team; and

(iii) a clear delegation of responsibility and authority tothe project manager by top management.

Direct lending to IMT and FOB, another Bank beneficiary (rather than throughan intermediary), as proposed by the Bank and accepted by the Borrowers, alsoassisted in successful implementation of the project through simplifiedprocedures and by permitting closer monitoring and supervision of the project.The original Yugoslav proposal called for a combined loan for the two projectsto the industrial group of which both companies are members, along the patternof earlier Bank loans through the Yugoslav Investment Bank.

30. The IMT experience also highlights the utility of frequent, evenbrief, supervision missions (particularly at the crucial stage of projectimplementation), which assist in smoothing out problems in the field as theyarise, especially those related to procurement and project implementation. Inthis context, Bank staff should be encouraged to contact Government authorities,when necessary, directly in the field rather than relying solely on communicationfrom Washington. In regard to procurement from local suppliers, where thatis justified, Bank appraisal missions, while encouraging the use of domesticsuppliers for its development benefits, should request the borrowers to assessthe ability and capacity of local suppliers to keep to the delivery schedulerequired to complete the project efficiently.

VuGOSL AVIA

IMT EXPANSION PROJECT

ORGANIZATIONAL CHART OF IMT - BEOGRAD

LWORKERS COUNCIL OF WMT

R. Rado1~

Cocd cmi E.aP.

BUAL BUAL BUAL BUAL DUAL BUAL Connfltu of C ofT~co Pöfni Pm~ Mi E n. a Ac - Srcn & R. reo WorK-

Pn m. ing.z. "y P .n .cs pu Cnt lMT Crn Adrn.stlal Deo.nr.. Dept

Wr. A~ernUY Workmn A~vny Works Asmndy Wokr Asy Wkrs Assn Woks An Workers Amb Worke As.b

~orkbr" Cmonca Wr& C~onn Wrkfrs Counc,l Worko Co~ ~kgConc Workm Coun~ Workr Couce Wokers CouncI

Exec~tn" Councl Excut~ Coun- Execut. Coun. Eeut- Comnc. E~acut- Coun. Etacctv Coqnc E~eca.-l Con Eecule Counc

BA. Djuron S MRr.c B.duij P Duapit M Swi,ovSc

T,actomPr Produt~o tchngPen~.e.4 åhh nAdm.naraton Dvelopment al MT

CntrotC Zrna DC Dared

Spe F .nnc &

hpPrcU^ Sihop P DubaC

M Predrovic

Ame Ske c.

Shop S KwzhIc

TmJnk 5~C~voul&Toly - Sho

-- CompteCen ter

Mainlenonce irn~r D,ý

_ TrMnsportamo

Wordd Bank - 17506

Indmf~t"& Proel DpearmentJ-.. 1977

- A.20 -

ANNEX IIPage 1

YUGOSLAVIA - IMT TRACTOR EXPANSION PROJECTProject Description

1. The project has been designed to increase the capacity of IMT's

Belgrade factory to an annual production volume of 35,000 tractors, 27,000implements and a proportionate number of accessories and spare parts.The new facilities allow, in addition to the present IMT product range,the manufacture of about 500 above-100 hp tractors/year. IMT's revisedexpansion program for the Belgrade factory under phase I is summarized

in the table below. The expansion under phase I was covered by Bankfinancing and that has been completed.

IMT Belgrade - Area and Facilities (m 2

Before Expansion After ExpansionPhase I

1) Total area 168,500 450,000

2) Production coveredImplement production 6,100 17,500Tractor parts machine shop 9,870 27,208

Tractor assembly shop 5,665 26,838

Sub-total 21,635 71,546

3) Officesa) Administration +

Production planning 1,690 7,170b) Development + Laboratory 2,650 5,970c) Sales + Finance department 1,848 1,848

d) others 1095 3,729

Sub-total 7,283 18,717

4) Covered storage areaa) Cellar 1,450 1,450b) Raw Material stores 2,300 8,123c) Other stores 3,423 5,849

Sub-total 7,173 15,422

5) Open storage area 36,000 36,000

- A. 21 -

ANNEX II

Page 2

2. At appraisal about 388,000 m2 of total area was envisioned afterexpansion. This was later increased by about 16% to allow space for laterexpansion of capacity. Also, part of the facilities to be constructed underphase II were included in the revised phase 1.

Industrial Projects DepartmentJune 1977

>4 4 a ase$tab-å hI . tbu 41 4 >i0nt .sø 44.

-4e

.. ~~ i..> - - se- 4 n 4. < O. SeI um .. tt< I 11$> 044 $~tt1A1 1t a4

- at, 0.44 li hI »tAt.;, 2> 4,.e..t4IlW ,p4 454 æ(

ø O iS 451- M t-Geen a < * < kGtø 0 øtA,..4

$44 I& .41 1'>s4t.4 at sc.. .. * > ø~...u4,,s 2>$41lr4A4< S14.(h >(144.4(4/1 $144~1 < grag #a4 g.4ti.4

- 44>.4

*~ 4 5 444.44.>44*. u l~4,,4f,4U.4fl~ 441. i.s* 4,4t -0~4>5444 ~ >550 4454*5 4 5 ltt 4 (0441 45441 54*4011144S44*45

.>. -L>*42 4,5*. *4«41444 4 .01443 tt».. ~ -4.140M444 C4>l .~L -..440 ts .. s &14

____ il

4

.@

--.

._ - -. .....YU

OSL.AV4A$MT EXPAN*S$tD MtOJECT

ll.5PLANT 1A4u?4A14R4THERECO4£ Uuc$O

- 44 444coss cans

lA,ta

- A.23 -ANNEX IIIPage 1

VUGOSLAVIA - IMT TRACTOR EXPANSION PROJECTCOMPARISdN OF ACTUAL IMPLEMENTATION SCHEDULE WITH ESTIMATES

Ya1973 14 g 1976

Mm A i i iA l o N F M A MIJ lj lAIS10 1N D J FIMJAIMji JIJ A 1-ClNJD 3 FIM A 0 1 j A c C m NTRACTOR PART$PROOUCTION PL.ANT

T .. . .. .. ..

EQUIPMENT 9 d$$e

TRACTORMAS MI L Y P L A T

CRNHT AmCexOP CeSNTI R C 4 CIN.

... .

STOR115

u e ä

comm~ame

...................... .. ... ... .. ..-. .

EO14UMENTen. Ge1101, 46,

0414^ cTt~Tt ........-.... - - - -

WM~d 5~.k1~6

j~y 1917

Industrial ProJecte DepartmentJune 1977

- A.24 -ANNEX III

YuGAVIA - IWr Tractor RxpAnsioA Proect Page 2

&*sig of palas in Civil works Completion

Activity Date of Completion ]) Reasons for delay

Estimated L

1. Construction of tractor 1/76 3/76 2 1. Government Regulations -

parts production shop with Seismic zone classification of theannexes and eaves; building area was revised upwards. Thisfor chip treatment install- necessitated redesigning in order toation; and underground fuel conform with building code requirements.and lubricants storage withpump station. 2. Scope Change -

increase in area to be constructed by26 at the detailed design stage also

contributed to delay.

2. Front Annex with pasarebla 1/76 r/75 -e

3. Tractor Assembly shop with iom7 3/76 5 1. Government ReKulations -side annex and eaves Change in seismic one claSsification.

2. Scope Change -Increase in area to be constructed by

0% at detailed design stage.

3. FAuipment delivery -Delay in delivery of conveyors held opworks related to installation.

2. Transformer Station 1/76 7/76 6 Re ations -Changes InWreguilations delayedprocurement of components.

5. Recontruction of cooling 1/76 1/77 12 Government Regulations -oil and emulsion preparation Design had to be modified so asstation end filtering plant to confirm with mew law on Humanfor used water. Environment Protection.

6. Land clearing3 levelling and 6 a76 -landscapingr and constructionof roads and sidewalks.

7. Compressor Station I/76 1o/75 -3

8. (Iffaite sewer and drainage 4/74 6/7h 2 Problems with settling of ground.

9. Water supply system V/76 7/76 -6

10. Gas bottle storage 1/76 7/76 3 Gcvernment Regulations -Changes in import regulations delayedprocurement.

11. Raw material store with "M7i 1/75 2 Goenet e ain -cutting shop. Change in claVniicaitijon of seismic

tone necessitated redesign of building.

12. Reconstruction of o1/76 12/75 1 scope -computer center. Involved increase of floor space by

about 300 square meters which was notforeseen earlier.

13. Building for chip treatment 1/76 3/716 2 Government Regulations -Installation, sheet metal store, Change in classification of seismicassembly and packing shops, one necessitated redesign of building.

14. Extersion of longitudinal 1/76 1/76 -Oaies se! nd d / o

15. Two gate offices with 1/76 1/76 -Installations.

16. Prototype and sawl series 1/81 11/76 -50production shop with eavesi

17. Spare parts storage. 1/81 7/76 -14

18. Scaffolding hall. I/81 1/76 -60

19. Garage with open parking 1/81 1/7a -basarea.

T1. dustri ProJects Department.Iune 1 977

-A.25 - ANNEX IIIPage 3

YUGOSLAVIA - IMT Tractor Expansion Project

Analysis of Major Delays in Equipment Procurement

Description Delay Reasons forof Equipment Manufacturer (days) Delay

Foreign Manufacturers

1. Transfer line for Burkhard & Weber, 90 1. IM did not deliverrear axles W. Germany samples o, the castings

to be machined by thetransfer line, in time.

2. The manufacturer didnot perform tests onthe transfer linebefore dispatching it.Problems were discoveredwhen test runs were madeat IMT. This delayedcommissioning.

2. Semi automatic Erhault Soniva France 150 1. Strikes at manufacturer'scopying lathe plant delayed delivery.

II Local Manufacturers

1. Special purpose I.L.R. Zeleznik 180 The local manufacturermachines for was unable to procuremachinery gear imported components inboxes time.

2. Special purpose I.L.R. Zeleznik 180 The local manufacturermachines for was unable to procuremachinery central imported components inhousings/casings time.

3. Special purpose Provomaiska Zagreb 390 1. Reorganization ofmachines for enterprise delayedsatelite carrier production.

2. Procurement of some ofthe components, whichare imported, wasdelayed.

4. Milling Machine Titovi Zavedi, Skopie 400 Production bottleneckscaused by shortage ofsteel and components.

Industrial Projects DepartmentJune 1977

- A.26 - ANNEX IV

YUCOSLAVIAIMT EXPANSION PROJECT

Market - Demand for Tractors

By Size Range

hp Category Social Sector Private Sector Total

. Units % Units Units

18 - 30 8.83 3,400 8.05 3,400

31 - 50 10.82 400 72.46 27,900 67.07 28,300

51 - 60 13.51 500 18.18 7,000 17.77 7,500

61 - 90 62.16 2,300 0.53 200 5.93 2,500

91 and over 13.51 500 - - 1.18 500

100.00 3,700 100.00 38,500 100.00 42,2009

By Use Category(1977)

Non- IMTAgricultural Agricultural Production

hp Use Use Export Total Market ProgramCategory Appr Present Appr Present Appr Present Appr Present Imports (1977)

18 - 30 4,050 3,350 50 50 300 300 4,500 3,700 - -

31 - 50 25,900 27,700 800 600 2,900 2,900 29,600 31,200 - 28,000

51 - 60 2,350 6,000 1,500 1,500 600 600 4,450 8,100 - 5,000

61 - 90 1,350 1,700 1,000 800 200 200 2,550 2,700 - 3,000

91 - over 350 450 50 50 - - 400 500 - 200

1/Total 34,000 39,200 3,500 3,000 4,000 4,000 41,500 46,200 5,000 36,200

1/ The difference between 42,200 and 46,200 is the 4,000 units for export

Industrial Projects DepartmentJune 1977

Yugoslavia - Ur Tractor Expansion Project

Income Statement - Comparison of Actual Vnd Anticipated Performance

(millions of current dinars)

1974 1975 1976 1977

Appraisal Actual Variance Appraisal Actual Variance Appraisal Actual Variance Appraisal Estimate Variance

I Net SalesDomstic 1316 1748 33 1705 22A3 3L 276 2,718 -2 3112 4180 34

Exports:Convertible 31 93 - 33 243 122 604 57 133 550 -

Clearing 41 4 - 43 - - 160 174 - -

Total Net Sales 1388 1845 33 1781 2526 42 3046 3,322 9 3419 4730 38

II Cost of Goods SoldMaterials, Supplies

& Utilities 1045 1336 28 1306 1796 38 2180 2,491 14 2392 3449 44

Labor 96 115 20 140 172 23 230 239 4 269 341 27

III Gross Profit 247 394 60 335 558 67 636 591 -7 758 940 24'

IV operating ExpensesMaintenante & Repair 41 43 5 55 82 49 87 127 46 94 158 68Administration & Selling 61 90 48 82 123 50 141 101 -28 156 116 -26

Depreciation 42 110 162 76 127 67 110 147 34 110 164 49

Other Expenses 6 48 - 8 61 - 30 73 143 32 119 272

V Operating Profit 97 103 6 115 165 43 268 144 -46 366 384 5

Other Income - 28 - - 19 - - 53 - - 12 -

Financial Charges 19 34 79 18 84 367 137 110 -20 132 188 42

VI Income before Taxes &Contributions 78 97 24 97 99 2 131 86 -34 234 208 -11

Taxes and Contribution 2 1 - 2 2 - 2 - - 2 1 -

VII Net Income 76 96 26 95 98 3 129 86 33 231 207 -10

VIII AppropropriationsReserve Fund 5 7 - 5 9 - 6 11 83

9 18 -

Collective Consumption Fund 15 30 100 15 37 147 20 38 95 30 69 130

Compulsory Loans 15 15 - 16 15 -6 18 - - 20 14 -30

Business Fund 41 44 7 59 36 -39 85 37 -57 149 107 -28

GM deflator (1973 basis) 1.10 1.225 11 1.19 1.448 22 1.26 1.34 1.76 31

L A=l data-iA taken from unaudited submissions from IMT, which are based on a system of acconting, different from that used normally. The

system yields some differences between statements due to the use of inflation accounting in some categories and not in others. 3 !

Industrial ProjectsJune 1977

8

20 38 95 3069 13

Yugoslavia - IU Tractor Bxpansion Proiect1/

Balance Sheet Statements - Comparison of Actualand Anticipated Performance

(millions of current diners)

1974 1975 1976 1977

Appraisal Actual Variance Appraisal Actual Variance A Actual Variance Apraisal Lstimate Variance

ASSETS

I Current AssetsCash 87 92 5 78 12 -85 99 93 -6 100 51 -49

Receivables 77 231 200 126 340 169 256 373 46 271 341 25Inventory 285 480 68 449 840 87 6 1097 79 651 1500 130

Sub-total 803 78 l52 1192 82 8 1563 61 1022 1892 85

II Fixed AssetsGross Fixed Assets 788 556 *30 1209 1475 20 1214 1648 36 1224 2008 64

Less: Accum1atedDepreciation 293 293 - 369 583 57 479 730 52 589 891 51

Net Fixed Assets Z -47 e 92 6 735 918 25 636 TIT 75

III Financial Assets 108 56 -49 190 62 -68 194 332 71 320 590 84

IV Other Assets 135 109 -19 155 179 15 f81 237 31 219 235 7

TOTAL ASSES 1186 1231 3 1838 2325 86 2078 3051 47 2197 3834 74

LIABILITIS

I Current LiabilitiesAccounts Payable 91 109 20 208 285 37 243 256 5 257 295 14 1Short-Term Debt 13 75 476 40 143 257 20 148 640 - 377 -Current Portion of LTD 34 .20 -42 36 32 -12 10-6 707 -28 101 116 14

Sub-total 138 a 47 284 40 369 481 30 358 788 120

I Lon-Term Debt 469 320 -32 877 854 -- 3 903 1349 49 802 16b8 110

III RealtReserve Fund 29 34 17 34 47 38 40 61 52 48 79 65Collective Consumption

Fund 106 127 20 121 196 61 141 250 77 171 288 .68Compulsory Loans 37 39 5 53 48 -10 71 ) 92 63 -32Business Fund 408 507 24 469 720 53 554 ) 910 45 726 931 28Sub-total 580 707 21 6 1011 49 T9 1221 51 1038 13T 7

TOTAL LIABILITIES 1186 1231 3 1838 2325 26 2078 3051 47 2198 3834 74

GNP deflator (1973 basis) 1.10 1.225 11 1.19 1.448 22 1.26 1.60 27 1.34 1.76 31

Current Ratio 3.3:1 3.9:1 2.3:1 2.6:1 2.6:1 3.2:1 2.9:1 2.4:1Debt/Equity Ratio 44:S6 31:69 56:44 43:57 53:47 53:47 44:56 55:45

1/ Actual data is taken from unaudited submissions from IMT, which are based on a system of accounting, different from that used normally.The system yields some differences between statements due to the use of inflation accouncing in some categories and not in others.

Industrial Projects DepartmentJune 1977

Yugoslavia - IM Tractor Expansion Project1/

Working Capital - Comparison of Actual and Anticipated Performance

(millions of current dinara)

1974 1975 1976 1977

Apraisal Actual Variance Appraisal Actual Variance Appraisal Actual Variance Appraisal atizate Veriance

A. Current AssetsCash 27.0 92.2 241 38.0 12.2 -68 60.0 92.7 54 61.8 50.5 -19Accounts Receivables 77.1 231.1 200 125.5 340.2 172 256.0 373.0 46 270.9 341.2 25

InventoryRaw Materials 181.2 304.5 68 310.2 465,3 50 436.6 647.8 48 62.8 930.9 101Work in Process 44.5 97.4 120 75.6 134.3 78 108.3 164.2 52 115.8 300.1 158Finished Goods 59.4 78.4 31 63.5 240.0 277 67.8 285.5 319 72.3 269.2 273Sub-total 285.1 480.3 68 449.3 839.6 86 612.7 1,097.5 79 650.8 1,500.2 130 1

Total Current Assets 389.2 803.6 106 612.8 1192.0 94 928.7 1,563.2 68 983.5 1,891.9 92

Lees: Accounts Payable 90.6 108.6 19 208.2 285.4 37 242.5 255.5 5 237.1 294.5 24

B. Working Capital 298.2 695.0 133 404.6 906.6 124 686.2 1,307.7 91 726.4 1,597.4 119

Incremental 10.2 200.5 1865 106.4 211.6 98 281.6 401.1 42 40.2 241.4 502

Cumulative since 1971' -7.3 389.5 - 99.1 601.1 507 380.7 1,002.2 163 420.9 1,247.9 196

GMP deflator (1973 basis) 1.1Q 1.225 11 1.19 1.448 22 1.26 1.34 1.76 3111 Actual data is taken from unaudited submissions from IMT, which are based on a system of accounting, different from that

that used normally. The system yields some differences between statements due to the use of inflation accounting in somecategories and not in others.

2/ These numbers were further prorated to take account of increase attributable to existing operations, e.g. the working capitalattributable to the Project was determined as 473 million dinars as against the cumulative incremental value of 1,006.5 up to 1976.

Industrial Projects Department 0June 1977

ANNEX VI- A.30 - Page 1

YUGOSLAVIAIMT EXPANSION PROJECT

FINANCIAL RATE OF RETURN CALCULATIONS

Incremental Financial Costs and Benefits

(Millions of Constant 1973 Dinars)

Fixed Assets Working Operating IncrementalYear and other Capital Cost Revenue

Investments-

1973 21.0 0 0 01974 175 .0 83 195 2211975 367.0 81 406 4591976 118.0 105 550 6211977 0.0 204 1,241 1,4031978 0.0 0 1,241 1,4031979 0.0 0 1,241 1,4031980 0.0 0 1,241 1,4031981 0.0 0 1,241 1,4031982 0.0 0 1,241 '1,4031983 0.0 0 1,241 1,4031984 0.0 0 1,241 1,4031985 0.0 0 1,241 1,4031986 0.0 0 1,241 1,4031987 0.0 -473 1,241 1,403

Sensitivity AnalysisFinancial Rate of Return %

Base Case 12.0

Sensitivity to Changes from Base Case

Benefits

+ 10% 27.0+ 5% 19.6- 5% 2.1- 10% -4.4

Operating Costs

+ 10% 5.1+ 5% -2.3- 5% 18.7- 10% 25.3

1/ Excluding phase II expansion (which for the most part was implemented along withphase I).

Industrial Projects DepartmentJune 1977

ANNEX VI- A.31 - Page 2

YUGOSLAVIAIMT EXPANSION PROJECT

FINANCIAL RATE OF RETURN CALCULATIONS

Major Assumptions

1. For 1973-77, the benefit and cost streams were discountedby the GMP deflator to 1973 dinars. From 1977 onward, price for inputsand outputs are assumed to follow the same behavior with no relativeinflation.

2. As against the appraisal assumption of achievement of fullproduction in 1.976, analysis here assumed full production from 1977onwards.

3. As al: appraisal, the plant is assumed to have a zero scrapvalue after its useful life of 14 years. Incremental working capital,however, is assumed to be fully recoverable in 1986.

4. Costs and benefits associated with the Phase II expansion,which for the most part were carried out with Phase I have been excluded.

Industrial Projects DepartmentJune 1977

- A.32 -ANNEX VIIPage 1

YUGOSLAVIAIMr EXPANSION PROJECT

ECONOMIC RATE OF RETURN CALCULATIONS

Incremental Economic Costs and Benefits(Millions of Constant 1973 Dinars)

Fixed Assets Working Operating IncrementalYear and other Capital Cost Benefit

Investments

1973 18.6 0 0 01974 157.3 75 175 2101975 326.1 73 365 4361976 105.5 95 495 5901977 0.0 183 1,117 1,3321978 0.0 0 1,117 1,3321979 0.0 0 1,117 1,3321980 0.0 0 1,117 1,3321981 0.0 0 1,117 1,3321982 0.0 0 1,117 1,3321983 0.0 0 1,117 1,3321984 0.0 0 1,117 1,3321985 0.0 0 1,117 1,3321986 0.0 0 1,117 1,3321987 0.0 -426 1,117 1,332

Sensitivity Analysis

Economic Rate of Return %

Base Case 20.4

Ibativty-o- Chq frolm BAsCs

+ 10% 36.2+ 5% 28.2- 5%

12.4- 10% 4.1

Operating Costs

+ 10% 6.8+ 5% 13.7- 5%

27.0- 10% 33.6

Industrial ProjectsJune 1977

- A.33 - ANNEX VIIPage 2

YUGOSLAVIAIMT EXPANSION PROJECT

ECCNOYIC RATE OF RETURN CALCULATIONS

Major Assumptions

In addition to those for financial analysis (Annex VI), the followingassumptions were used for the economic analysis:

1. Duties and taxes were excluded from investment costs,resulting in a decrease in the investment stream of around 11%.

2. Economic operating costs were assumed to be around 10%lower than the financial to allow for duties and taxes and fordomestically produced inputs, the difference between local baseprices and international prices.

3. The economic prices of IMT's products were determined bycomparison with international prices and are assumed to be 5% lowerthan the financial prices.

Industrial Projects DepartmentJune 1977