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7 >9-~ /LL RESTRICTED Report No. p-953 This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the rCport. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON PROPOSED LOANS TO THE "BABIN KUK" HOTELSKO TURISTICKI CENTAR, DUBROVNIK AND THE HOTEL "BERNARDIN", PIRAN WITH THE GUARANTEE OF THE SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA June 2, 1971 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

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Page 1: INTERNATIONAL BANK FOR RECONSTRUCTION AND …documents.worldbank.org/curated/en/202151468159305237/pdf/mul… · Zastupstva, Dubrovnik, and "Emona", Proizvodnja, Trgovina, Turizem,

7 >9-~ /LL RESTRICTED

Report No. p-953

This report is for official use only by the Bank Group and specifically authorized organizations

or persons. It may not be published, quoted or cited without Bank Group authorization. The

Bank Group does not accept responsibility for the accuracy or completeness of the rCport.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

EXECUTIVE DIRECTORS

ON

PROPOSED LOANS

TO THE

"BABIN KUK" HOTELSKO TURISTICKI CENTAR, DUBROVNIK

AND THE

HOTEL "BERNARDIN", PIRAN

WITH THE GUARANTEE OF

THE SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA

June 2, 1971

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FL1SOWT 1)ND REC-aj4iNDATION OF '[A1 1aES)ITDTO) mIE FECurI_VE DRILRCJ. SSON FRO±'OS-ZD LOANS TO IHE

"BABIN KUK" HOTELSKO TURISTICKI CENTAR, DUBROVNIKAND THE

HOTEL "BERNARDIN", PIRAN

1. I submit the following report and recommendation on two proposed loansfor tourism projects, both to be guaranteed by the Socialist Federal Republicof Yugoslavia. They are: US $20 million equivalent 71½ percent loan for22 years including 5 years of grace to the "Babin Kuk" Hotelsko TuristickiCentar, Dubrovnik; US $10 million equivalent 71½ percent loan for 25 yearsincluding 5 years of grace to th e Hotel "Bernardin" Piran. The FederalGovernment and the project sponsors, "Minceta" Export-Import InozomaZastupstva, Dubrovnik, and "Emona", Proizvodnja, Trgovina, Turizem,Inzeniring, Ljubljana, independent enterprises under Yugoslav law, haverequested these loans to help finance respectively, the construction andorganization of a 5,000 bed integrated tourist complex near Dubrovnik, anda similar 2,500 bed complex near Piran. Local financial arrangements havebeen made respectively with Privredna Banka, Zagreb, and Ljubljanska Banka,Ljubljana. The proposed loans would be the Bank's first for tourism. Sincethe projects share many features, they are discussed together in this report.

2. An economic report entitled "Current Economic Position and Prospects ofYugoslavia" (EMA-33a) dated May 14, 1971, was distributed to the ExecutiveDirectors on May 24, 1971. Reference should also be made to the Report ofthe President on the Ibar Multipurpose Project (P-944), which was circulatedfor ccnsideration by the Executive Directors on June 10, 1971, for adiscussion of the econony of Yugoslavia and the role of the Bank in assistingYugoslav economic development. A list of past loans to Yugoslavia is foundin Annex I and a basic eccnomic data sheet in Annex II.

PART I - THE TOLRIQM SECTCR

3. Yugoslavia, with over 2,000 km of mountainous coastline of great scenicbeauty, warm dry summers, and picturesque old coastal towns and villages,possesses tourist attractions which compare favorably with any in theMediterranean. The country's relative proximity to the major tourist generaI-iingcenters of Europe is also important. The principal destinations of holidayvisitors to Yugoslavia are resorts on the Adriatic coast where about 80 percc-4,of foreign visitor nights are spent and almost two-thirds of all hotel capaci yis located. As in other Mediterranean countries, Yugoslavia's foreign touristtraffic is seasonal with peaks in July and August.

4. The fast growth of foreign tourism to Yugoslavia has occurred mainly inthe past decade. It has resulted from growing prosperity in Europe, liberalentry policies to Yugoslavia, the implementation of certain key investments,particularly the construction of the Adriatic highway (partly financed by

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Loan 3h4-YU of 1963) and the rapid expansion of hotel capacity. Foreignvisitor-nights spent in Yugoslavia increased more than five-fold over thedecade to reach 22.4 million in 1969, while estimated excursion traffic(those not staying overnight) increased from 1 million visitors in 1960to 30 million in 1969.

5. Gross foreign exchange earnings from tourism, including those arisingfrom tourist transportation, are estimated to have risen from US $22 millionin 1960 to US $310 million in 1969, an average annual growth rate of 35 percerlt.As a proportion of total receipts from exports of goods and services, tourismreceipts rose from 3 percent to 13 percent over this period. Between 1960and 1969, 50,000 new jobs were created in tourism and catering in the socializ-dsector, which at present absorbs about 130,000 wqorkers (3.5 percent of totalemployment). In addition many small private ventures have developed (restau-rants, pensions, etc.), particularly along the Adriatic coast, but statisticson these are not available.

6. Recognizing the important contribution that tourism could make to forei,nmexchange earnings, particularly in convertible currencies, the Federal andRepublican Governments have taken a series of measures to assist the growthof the sector. The most important of these are: tourism oriented infrastruct§o;ceprojects, liberalization of regulations on entry of foreign visitors, theintroduction of financial incentives such as interest subsidies for developfle±t1of tourist facilities, and the promotion of comprehensive regional plans withparticular emphasis on tourism. The most ambitious of these is the PhysicalDevelopment Planfor the South Adriatic Region, a joint Government-UNDP under-taking. This plan provides for orderly development of the whole South Adriat+c,coast and is oriented towards the development of tourism and the identificatiorinof investment projects related thereto. The Babin Kuk project is an importanftelement in the plan. A similar plan is now being implemented for the NorthAdriatic region with UNDP assistance.

7. The various incentives to development have helped to bring about a majorexpansion of hotel capacity. From 1960 to 1969 it rose from 33,000 to 130,0CObeds, and investment is continuing. The 1971-75 Draft Plan for the industryenvisages a total investment exceeding $500 million, and additions to capacit,rTof 100,000 to 120,000 hotel beds. It also forecasts foreign exchange earningsof US $900 million in 1975. These targets are ambitious but Yugoslavia'spresent share of Mediterranean tourism is still modest; hotel capacity is lessthan 6 percent of the total in M4editerranean countries. Hotel and othertariffs in Yugoslavia are 20-25 percent lower than in competing countries ofthe region, and Yugoslavia should be able to increase its share of Mediterrar.e>_tourism.

8. The Bank's objectives in assisting tourism in Yugoslavia are threefold:to implement economically feasible projects in regions with few other econormr;possibilities, to assist in developing new techniques of tourism organizationand construction which will demonstrate the possibility of improving the

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earnings potential of this sector, and to stimulate the infrastructureimprovements needed for the earnings potential to be realized. The BabinKuk and Bernardin projects serve these objectives. The three road projectsfinanced by the Bank between FY 1969 and 1971 have also each included roadswhich are important for iDurist traffic.

PART II -rhE BABIN KUK PROJECT

9. A report entitled "Appraisal of the Babin Kuk Tourism Project,Yugoslavia' (PT-I), dated June 2, 1971 is attached (No. 1). A loan andproject summary, including map, is given in Annex III to thisReport.

Description

10. The Babin Kuk Project will establish a large integrated tourism complexon the South Adriatic Coast of Yugoslavia in the Republic of Croatia. The s4b'Gfor the project is a smali peninsula, about 4 km to the north of the oldwalled city of Dubrovnik. Partly pine-covered, the area slopes gently froma high point (altitude 100 m) to the sea. It has about 1.5 km of indentedrocky coastline and about 0.5 km to the northeast is the small island ofDaksa which has sandy beaches and dense woods. Because of its topographythe site offers panoramic views of the sea and surrounding islands, and ithas a slightLy more favorable cLimate than the old city. Besides the greatscenic beauty of the mountainous coatline, the palaces, churches and monastefieq-iof the old city are tourism assets in themselves and provide a unique settingfor a summer festival offering music, drama, opera and dance which is a majorattraction for tourisms.

11. The project is one of the largest so far developed in Yugoslavia or elseahere.It will include nine hotels with a total of about 5,000 beds; one hotel willbe in the luxury class with 300 beds, four will be A class with 1,700 beds,and the remainder B class with 3,000 beds. The four B class hotels willoperate seasonally (April-October).

Size and Management of the Project

12. The scale of the project offers considerable potential economies inconstruction and operation. The hotels will operate individually but parti-cipate in certain conmon services and be under the general direction of themanagement of the complex. This will leave most day-to-day operations inunits of easi'ly manageable size. It will at the same time provide substantic'2.operating economies from joint advertising and promotion, training and thepurchase of supplies, and from the provision of services such as heating andlaundry, which will be operated for the complex as a whole. There will alsobe a common computerized reservations system which will ease the handling oflarge groups, increasingly characteristic of modern tourism.

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13. However, the realization of this potential will require the developmenitof new management systerm- to identify and provide solutions to problems whichhave not yet been met in the industry. It will also require the selection arc.otraining of a management team. The creation of a successful managementstructure for the complex may be divided into two distinct but inter-dependernLphases. The pre-opening phase would be concerned with developing andcoordinating the systems and procedures and wibh recruiting and training thekey personnel required to achieve the operating standards set for the projec.LThe post-opening phase would be concerned with operating the complex usingthe systems, procedures and staff developed in the pre-opening phase andintroducing changes indicated by actual operating experience.

14. The project sponsor, "Minceta" Export-Import Inozemna Zastupstva,Dubrovnik, is an enterprise established under Yugoslav law in 1962 by themerger of several small enterprises. It is principally engaged in the :Lmport,export, wJholesale and retail trades. Minceta has a record of successful sal^sand profit growth, but like many Yugoslav firms, has potential liquidityproblems. Minceta's top management is dynamic, although the managementstructure lacks depth and has little experience in hotel operations. More-over, the company is small relative to the project. Consideration was givento obtaining a foreign or domestic partner, but few traditional hotel firmshave had experience with a complex project of this size. It was thereforeagreed with the sponsor to separate the operation of the project from thesponsor's other and unrelated activities by establishing a new unit with itsown management, and to engage consultants to provide substantial managementsupport.

15. Because of the size and uniqueness of the project, no organization orconsultant has had actual experience of the problems that will be posed byBabin Kuk. The solution chosen is to blend the knowledge and experience ofmanagement consultants, the expertise available in the international hotelindustry, ancd Yugoslav resources to create a team which is capable ofdeveloping theneicessary management systems prior to opening the complex andhas the ability to apply and adapt them during the operation of the projectafter the corsultants have departed.

Infrastructure

16. The project will place substantial demands on infrastructure in theDubrovnik area and improvements are required in transportation, water supply,sewage disposal, and the airport. The competent authorities have givenassurances through the Guarantor that the essential minimum requirementswill be met by the opening date. In addition, certain other improvementsin transportation and sewage facilities would be desirable to support theprojected hotel investment. The proposed loan includes $300,C00 forconsultantst services in preparing plans for these facilities and the Bankhas been asked to consider a further loan to help finance their construction.

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Ecology

17. The preservation and improvement of the environment has been a considera-tion in several of the provisions of the project. On the site, the buildingswill be located to preserve a green zone containing rare tree specimens. Thenew sewerage system,which will replace an old Roman system,is the object ofthe joint engineering/marine ecology study to be partly financed by theproposed loan. The outfall will be designed to keep the pollution of theswimming beaches of the Dubrovnik urban area within acceptable estheticand health standards. A broad study of transportation possibilities withinthe urban area will be undertaken to provide for the increased traffic whilepreserving the special atmosphere that is one of the main attractions ofDubrovnik.

Organization of the Borrower

18. The Borrower, "Babin Kuk" Hotelsko Turisticki Centar, Dubrovnik, has beennewly established by the sponsor, Minceta, as a financially independent unitwith its own legal personality within the parent enterprise. Such a unit isa unique creation of Yugoslav law, not so far encountered by the Bank in anyof its othex member countries, or hitherto, in Yugoslavia. An admittedlyimperfect classification in the usual corporate terminology might place itsomewhere between a division and a subsidiary, although in some respects itseems to enjoy a position of equality not unlike an independent third party.It is interesting to note, for example, that the unit cannot be liquidatedby the enterprise without the unit's agreement.

19. The Borrower was originally created by a decision of Minceta1 s workers'council. The Borrower's splhere of activity and the basic relations betweenthe Borrower and Minceta were subsequently laid down in a Statutory Agreemenltentered into by the two parties. In addition, the Borrower and Minceta signeda Joint Venture Agreement in which they agreed to jointly carry out the presentproject. The Joint Venture Agreement provides for the necessary financing,the management structure of the project (major decisions are taken by aBusiness Committee composed of representatives of both parties, with amajority being representatives of Minceta), for the sharing of profit andloss and liability for debts between the parties.

20. The project will be constructed and operated under the supervision of aDirector whose appointment will be subject to Bank and Privredna Banka (theco-lender) concurrence during the period of construction and the first threeyears of operation. The Director will report to the Business Committee. Hewill be assisted by architectural, engineering and management consultantsselected with the concurrence of the Bank and Privredna Banka, and during theconstruction period by a construction office with the required technical staff,

Financial Arrangements

21. The financial structure of the project is given in Annex III. Under theJoint Venture Agreement, Minceta will provide about 20 percent of -the projectcost as "equityt " from which it will gain certain rights to management and

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income. By international standards, this equity share is low for a hotelproject. However, in Yugoslavia, equity in the usual sense does not exist.Rather, rights usually associated with equity may be obtained through contrac-Pssuch as the Joint Venture Agreement in the present case. Debt financing,formerly by the government, now by banks, is the more usual form of new venturecapital. This explains both the low "equity" portion and the fact that muchof this "equity" is in turn borrowed by Minceta from the Privredna Banka,Zagreb. Privredna Banka thus plays a very important role in the project. Itrill lend the equivalent of $21.3 million to Minceta: of this amount, $13.3million will be on-lent to Babin Kuk, subordinated to the Bank Loan, and theother $8 million will be provided by Minceta to the Borrower as "equity". Inaddition, f4inceta has agreed to provide for cost overruns. Privredna Banka hD.salso (a) undertaken a cost overrun commnitment, (b) agreed so subordinate itsrights to the Bank's Loan and (c) waived its right to claim repayment of the$8 million "equity" investment from the Borrower. The Borrower has undertakennot to carry out major new projects or incur debts beyond a certain limitwithout the Bank's ard Privredna Banka's agreement.

Subsidies

22. As noted above, Yugoslavia provides interest rate subsidies to tourismprojects. The net effect of the subsidies, paid by the Republic of Croatia,is to reduce the interest rate on the dinar loan to Babin Kuk to 3 percent.The effects of such subsidies are often questionable on general economicgrounds because the artificially low cost of capital tends to encourageexcessive capital intensive projects. However, capital/labor ratios are lessflexible in t;ourism than in many other industries. This limits the tendencyto substitute subsidized capital for labor. Moreover, in the present projecl,any tendency to make extravagant use of capital will be prevented by carefulcontrol of design and costs. In this the Bank will play a role through itsreview of architects' terms of reference, designs, bidding documents andsupervision. Furthermore, subsidies to tourism projects reflect the factthat much of the benefits from tourism are diffused throughout the economy andare difficult to capture by the sponsors.

Procurement and Local Cost Financing

23. Contracts for construction and equipment would be grouped to formeccnomic bid packages and bids would be awarded after international competiticMiuIn bid evaluation for goods, local manufactures would be given a 15 percentmargin of preference or the applicable customs tariff, whichever is lower.Depending on whether local or foreign contractors would carry out the projectand the extent to which foreign equipment would be used, the foreign exchangecomponent in the total project costs could range frcm 24 to 38 percent. On ti':!assumption that Yugoslav bidders would win the construction contracts and th-T;the bulk of equipment would be imported, the foreign exchange component wouldbe about 30 percent, or ULS $13.8 million (see Annex III). An additional$2.8 million of foreign exchange would cover interest during construction onthe Bank loan. The proposed loan of $20 million is thus expected to finance

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about $3.4 million of local currency expenditure. The case for financinglocal expernditure in Yugoslavia was made in my Report and Recommenidation onthe Ibar Multipurpose Water Project (P-944) dated May 18, 1971.

Economic Justification

24. A holiday in Dubrovnik is within the reach of a small but rapidly growingsection of the European tourism market, as well as a significant portion ofthe domestic market. Because of the unusual attractiveness of the town, thecompetitive prices and the present limited hotel capacity, occupancy ratesare exceptionally high as compared with other competitive Mediterranean resorts.The growth of touriat traffic is mainly limited by the growth of capacity.W^,ith adequate promotion and service at competitive prices, the project isexpected to achieve satisfactory occupancy rates with 1 ittle difficulty.

25. The economic benefits, as calculated by the expenditures of the guestsstaying at the project, who will largely be foreign, would be about 17 perrent.This estimate does not take account of expenditures outside the project, northe real economic costs of certain of the factors of production, both ofwhich would increase the rate of return. 1Then in full operation, the projectis expected to bring to the economy annual net foreign exchange earnings of$14.7 million equivalent.

PIART III - THE BERNARDTh PROJWECT

26. A report entitled "Appraisal of the Bernardin Tourism Project,Yugoslavia" (PT-2), dated June 2, 1971, is attached (No. 2). A loan andproject summary, including map, iE given in Annex IV to this Report.

27. Like Babin Kuk, the Bernardin Project provides for the construction andorganization of a large integrated tourism complex. Bernardin would have2,500 beds and because of its location in Slovenia near Trieste would servea more competitive market. The organizational and financial arrange:mentsare very similar to those for the Babin Kuk Project.

28. The Bernardin Project comprises a first-class hotel of 00 beds and annexhotels of slightly lower standard with altogether 2,100 beds. Only the first-class hotel will be open year-round. The site for the propect is the smallcoastal promontory of Bernardin located to the west of the city of Portorozand 1.5 km from the ancient walled city of Piran. Piran, an attraction initself, offers a summer festival of traditional music and is within easy accesuby road and hovercraft from the major tourist centers of Trieste and Venice.As in Babin Kuk, the project concept of a nucleus hotel with annexes permitsoperational flexibility and offers potential economies. Management systemswill be developed with the assistance of management consultants.

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,ronsor and Borrower

29. The project sponsor, "Emona", Proizvodnja, Trgovina, Turizem, Inzenirirg,Ljubljana, was created by the merger in April 1970 of the enterprise "Prehrarna'"an export and wholesale company, and "Agrokombinat Emlona", a large meat produccl.It is the tenth largest Yugoslav trading firm. Emona's principal business isthe production, processing, distribution and sale of foodstuffs, but theenterprise is widely diversified and also operates tour agencies, hotels and anengineering firm. The management structure has depth and the top managementis experienced and dynamic.

30. The Borrower, Hotel "Bernardin", Piran, is, like Babin Kuk, a newlyestablished unit within the sponsor "Emona" with its own legal personality aridan independent financial structure. The debts of the Borrower, including theproposed Bank loan, will be guarantteed by the sponsor, but the Borrower willhave only limited liability for the obligations of Emona. A Statutory Agree-ment and a Joint Venture Agreement set out in detail the relationship betweenEmona and thes Borrower as required by Yugoslav law.

Financial Arrangements

31. The financial arructure of the project is shown in Annex IV. LjubljanskaBanka, the cc-lender for this project, will lend the equivalent of $14.8 millionplus interest during construction to Emona. Of this, $5.5 million will beinvested in Hotel Bernardin as Emona's equity contribution to the joint venture.The remaining $9.3 million will be re-lent to Hotel Bernardin under the sameterms and conditions as the loan to Emona. Cost overruns will be covered ei'l-erby Emona or by Ljubljanska Banka, and the Ljubljanska Banka's rights will besubordinated to the Bank's loan. The Borrower has undertaken no-t to carry oUJmajor new projects or incur debts beyond a certain limit without the Bank'sand Ljubljanska Banka's agreement. Hotel Bernardin will also qualify forinterest rate subsidies from the Republic of Slovenia. These subsidies willreduce the effective interest rate paid by the project to 2.5 percent for thedinar loan and to about 4.75 percent on the Bank loan.

Local Currency Financing and Procurement

32. The proposed loan of $10 million will cover $9.1 million or 38 percent ofthe project cost plus $0.9 million of interest during construction. The foreignexchange component is expected to lie between 24 and 38 percent of the projectcost, depending on the success of Yugoslav manufacturing and construction firmsin the bidding. Based on past experience, the most likely foreign exchangecomponent will be $6.9 million, or 29 percent, of the project cost. Thus itis likely, as in the Babin Kuk project, that the Bank will finance some localcosts, estimated in this case at about $2.2 million. The procurement arrange-ments wculd be the same as for the Babin Kuk project (see para. 23 above).

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Infrastructure and Ecology

33. The Bernardin project will require improvements in the road systemserving the Piran area and an expansion of the sewerage system. rhe realign-ment of the road crossing the project site is part of the project and thegovernment has undertaken to see that the other necessary road improvementswill be carried out. The plan for the expansion of the sewerage system hasbeen based on pollution studies and assurances have been obtained that theexpansion will be completed in time for the opening of the project. The

government will also undertake a study for the relief of traffic congestionand parking problems in Piran.

Economic Justification

34. The Slovenian coast attracts both stopover visitors and day visitors,the latter mainly fran Italy. This traffic is highly seasonal with most ofthe visitors arriving by road. The proximity to the population centers ofEurope and the lower cost of accommodation offered, as compared with compe-titive destinations in Italy, Austria and Germany, account for the rapidgrowth of tourism in the region over the last few years. Because the potenbialmarket is quite broad, this growth is expected to continue over the next

several years. Hotel Bernardin will have a number of competitive features inattracting a share of this market, and with sound management is expected tohave a financial return of 8 percent. The economic rate of return, calculater7in the same manner as Babin Kuk, would be about 13 percent.

FART IV - LEGAL INSTRUMENTS AND AUTHORITY

32. The draft Loan Agreements between the Bank and "Babin KukI' Hotelsko-Turisticki Centar, Dubrovnik, and the Bank and Hoteli'Eernardin't , Piran, thedraft Guarantee Agreements between the Socialist Federal Republic of Yugoslaviaand the Bank, and the draft Administration and Financing Agreements betweenthe Bank, "114inceta"i, Export-Import Inozemna Zastupstva, Dubrovnik, and PrivredrnaBanka Zagreb, and between the Bank, "Emona", Proizvodnja, Trgovina, Turizem,Inzeniring, Ljubljana and Ljubljanska Banka, Ljubljana, the Reports of theCommittee provided for in Article III, Section h(iii) of the Articles ofAgreement, and the texts of resolutions approving the proposed loans are beingdistributed separately to the Executive Directors.

33. The draft Loan Agreements, in addition to covenants reflecting theundertakings referred to in paragraphs 19, 20, 21, 30 and 31, containappropriate provisions concerning the maintenance of the Borrowers' statusas independent units. In the case of the Babin Kuk project, the Loan Agreemenitalso provides for the relending by the Borrower of a portion of the Loan, unde:rterms and conditions acceptable to the Bank, to authorities of the City of

Dubrovnik for the purpose of carrying out a sewerage study anda traffic study.

34. Additional conditions of effectiveness of both Loan and Guarantee Agreemenitsinclude in respect of each project: (i) the employment of the Borrower t s Director,of management consultants, and architectural and engineering consultants;

(ii) the establishment of the construction office; (iii) the acquisition of no3t

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of the land required for the project; (iv) the execution of the loanagreement for the financing from the co-lender; and (v) the completion ofall legal instruments relating to the establishment of the Borrower and itsfinancing by the sponsor.

35. Both Acldnistration and Financing Agreements provide for (i) the spoflsor?sguarantee of' the Bank loan; (ii) the sponsor's and co-lender's overrun commit-ment; (iii) subordination to the Bank loan of the debt financing made availableto the Borrower by the co-lender through the sponsor; (iv) the co-l'enderswaiver of any right it might have to claim repayment by the Borrower of thesponsor's "equity" contribution to the Borrower; and (v) close cooperationamong the parties.

36. The Guarantee Agreements include the Guarantor's obligation to completeor arrange to have completed the studies and infrastructure works essentialfor the operation of the p ojects in time for the beginning of such operatioi.

37. I am satisfied that the proposed loans would comply with the Articles ofAgreement of the Bank.

PART V - RECOMNT4DATION

38. I recommend that the Executive Directors approve the proposed loans.

Robert S. McNamaraPresident

Attachimenits

June 2, 1971

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ANMEX I

Bank Loans Made to Yugoslavia as of April 30,1971

Amount (US $ nilliD)No. Year Borrower Purpose Bank Undi.sburseJ

8 loans fully disbursed 200.7

395-YU 1964 Yugoslav Investment Bank Railways 70.0 11.6

504-YU 1967 Yugoslav Investment Bank Industry 10.5 2.0

531-YU 1968 Yugoslav Investment Bank Railways 50.0 31.2

554-YU 1968 Yugoslav Investment Bank Industry 16.0 7.1

608-YUJ 1969 Socialist Federal Republic Highways 30.0 19.6of Yugoslavia

654-YU 1970 Yugoslav Investment Bank Industry 18.5 11.4

657-YU 1970 Yugoslav Investment Bank Telecommuni- 40.0 40.0cations

678-YU 1970 Socialist Federal Republic Highways 40.0 40.0of Yugoslavia

Total (less cancellations) 475.5of which has been repaid toBank and others 60.8

Total now outstanding 414.7

Amount sold 6.2of which has been repaid 4.0 2.2

Total now held by Bank l2.5

Total undisbursed 162.9

Statament of IFC Investment for Yugoslavia as of March 31, 1971:

Year f2,y Amount (TT9 $ million)Equity Total

1970 International Investment Corporation forYugoslavia 2.0 2.0

1970 Zavodi Crvena Zastava/Fiat S.P.A. 8.o 8¢Q

Total 10.0 10.0

Less sold or repaid .6 .6

Now held 944 4-

June 2, 1971

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ANNEX IIYUGOSLAVIA -

BASIC DATA

Area: 256,000 square kilometers

Population: 20.5 million (1970)Current growth rate: 0.9%Density per square kilometer: 80

Gross Domestic Product (at 1966 factor cost) 1968 1969 1970

Total (US $ billion) 8.4 9.1 9.6Rate of growth 3.3% 9.3% 4.7%Per capita G14P (US dollars) 510 575 625

Gross Domestic Product by Branch Percent19 65 19 70

Agriculture, forestry and fishing 23 21Mining and arulfacturing 31 32Construction 10 11Transport and communications 7 8Trade and Barnking 9 10Public services and defense 11 10Other sectors 9 8

Balance of Payments (US $ million) 1972 a Increase (p.a.) 1966-1970

Commodity exports (f.o.b.) 1,670 10Commodity imports (c.i.f.) 2,845 17Net invisibles (including transfers) 805 25Current account balance - 370Net capital inflow 242Change in reserves (increase = - ) 128

Investment and Savings (A of GNP) 1969 1965-69 (average)

Gross investment 30 32National savings 28 30Savings gap 2 2

Money and Credit 1970 (Sept.) Rate of Change (percent)D billion 1965 1969 1970 (Jan.-Sept.)

Money supply 39 + 24 + 12 + 21Time and restricted deposits 29 + 11 + 18 + 6Short-term credit 62 + 12 + 16 + 12

(Pr cducer s 0 + 3 + 9Prices (Retail + 6 + 7 + 10

/a Preliminary

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ANNEX IIPage 2

Public Sector Finances 1970 1969 1970(D billion) 1 91

Budgetary receipts 27.2 + 12% + 15%

Budgetary expenditures 22.3 + 13% + 15%

Balance + 4.9 + 9% + 17%

Extrabudgetary receipts 29.5 + 20% + 17%

(including social security funds)Extrabudgetary expenditures 33.4 + 19% + 15%

Balance - 3.9 - 12% - 5%

Gross Convertible Reserves (US $ million) 1969 1970(end of year)

Total 342 280In months of commodity imports

from the convertible currency area 2.7 1.6

IMF Position (US $ million) December 31, 1970

Quota 207Drawings outstanding 40

Bank Position (US $ million) December 31, 1970

Total loans (less cancellations) 475Repayments 53

Total loans outstandling U7o.f which: undisbursed 174

Total disbursed and outstanc'ing 248of which: to Bank 242

to others 6

External Debt Position (US $ million)(in convertibTecurrencies only)

Total debt outstanding on December 31, 1969(including undisbursed) 2,268

Estimated debt service payments (1970) 475Ratio of debt service to gross foreign

exchange earnings (1970) 22

Exchange rate: Before January 23, 1971:

US$. = D 12.5D 1 8 US cents

Since January 23, 1971:

US$ 1 = D 15.0D 1 = 6.67 US cents

June 2, 1971

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ANNEX III"BABDIL KTK' t HTC - LOAN ANIKD PROJECT SU-MARY

Borrower: "Babin Kuk" Ilotelsko-Turisticki Centar, Dubrovnik

Sponsor: "Nincetall Export-Import,Inozemna Zastupstva, Dubrovnik

Guarantor: Socialist Federal Republic of Yugoslavia

Domestic Finance: Privredna Banka, Zagreb

Amount and Terms US$20 million equivalent, 7-1/4 percent, 22 yearsof Loan: including 5 years' grace

Project: Construction and organization of a 5,000 bed integratedtourism project on the Babin Kuk peninsula, near Dubrovnik.including shops, hotels and associated infrastructure

Economic Rateof Return: 17%

Cost of Project: Local Foreign Total(US$ million)

Land 1.50 1.50Site Development 2.69 .74 31Buildings 15.41 4 .26 19.67Equipment 1.45 3.21 4.66Consultants: a) Babin Kuk complex 1.27 2.21 3.48

b) for traffic and sewerage .30 .30Administration, training .60 .18 .78Working Capital 1.13 1.13

Total before contingencies 24.05 10.90 34-97

Price and physical contingencies 7.72 2.86 10.58Total 31-77 13.76 45.53

Interest during construction 1.58 2.80 4.38

FinancIg: (US$ million)IBRD Loan - foreign expenditure 13-76

- local expenditure 3.44- interest during construction 2.80 20.00

Minceta. (from own resources) - equity 1.50- credit 1.13

(from Privredna Banka) - equity 8.oo- loan 13.30 22.93

Privredna Banka overrun commitment 5.98

Total 49.91Financial Rate of Return: 9%

Procurement Arrangements: International competitive bidding for constructionand equipment

Construction Period: July 1971 to December 1974)

Estimated Disbursements: (US$ million) 1972 1973 1974 19752.1 3.9 7.6 6.4

Consultant: Consultant architects and engineers for design and supervisionof construction; management consultants for financial andsystem planning.

June 2, 1971

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ANI\E,:X TV

HOTEL "i?IThARDIH", PrIPAN - T?0A; AND PROJECT SUTIAvRY

Borrower: Hotel "Bernardinfl, Piran

Sponsor: t'Emonatl, Proizvodnja, Trgovina, Turizem, Inzeniring,LJub-

Guarantor: Socialist Federal Republic of Yugoslavia ljwla

Domestic Finance: Ljubljanska Banka, Ljubljana

Amount and Terms US$10 million equivalent, 7-1/4 percent, 25 years in-of Loan: cluding 5 yearst grace

Project: Construction and organization of a 2,500 bed integratedtourism project near Piran, including shops, hotels andassociated infrastructure

Economic Ra-te ofReturn: UZ

Cost of Project: Local Foreign Total(US$ million)

Land .0o4 1.O4Site development 1.53 L2 1.95Buildings 8.23 2.26 104.9Equipment .61 1.38 1.99Consultants .61 1.28 1.89Administration and training .40 .12 .52Working capital .46 .46

Total before contingencies 12.88 5.46 18.34Price and physical contingencies 4.L1 1i44 5.55

Total 16.99 6.90 23.89Interest during construction go.90 1.6

Financing: (US$ million)

IBRD Loan - foreign expenditure 6.90- local expenditure 2.20- interest during construction .90 10.00

Emona (from Ljubljanska Banka) - equity 5.50- loan 10.07 15.57

Total 25-57

Financial Rate of Return: 8%

Procurement Arrangements: International competitive bidding for con-struction and equipment

Construction Period: July 1971 to December 1975

Estimated Disbursements: (US$ million) 1972 1973 1974 19751.1 2.3 4.2 2.4

Consultant: Consulting architects and engineers for design and supervisionof construction; management consultants for financial andsystem planning.

June 2, 1971