Docinient of The WorldBank FOR OICIAL USE ONLY A/ 3c77-7- rO. ReportNo. P-5014-TU MEMORANDUM ANDRECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION ANDDEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO USO150 MILLION TO THE REPUBLIC OF TURKEY FOR AN AGROINDUSTRY PROJECT MAY 10, 1989 This document has a restricted distribution and may be used by recipients ony In the performance of their oMcial duties. Its contents may not oherwise be disclosed without World Bank authrization Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Docinient of
The World Bank
FOR OICIAL USE ONLY
A/ 3c77-7- rO.
Report No. P-5014-TU
MEMORANDUM AND RECOMMENDATION
OF THE
PRESIDENT OF THE
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
TO THE
EXECUTIVE DIRECTORS
ON A
PROPOSED LOAN
IN AN AMOUNT EQUIVALENT TO USO150 MILLION
TO THE
REPUBLIC OF TURKEY
FOR AN
AGROINDUSTRY PROJECT
MAY 10, 1989
This document has a restricted distribution and may be used by recipients ony In the performance oftheir oMcial duties. Its contents may not oherwise be disclosed without World Bank authrization
FERlS - Foreigl Exchange Risk Insne SchemeGOT - Govemment of TurkeyHB - Halkl ankLIB - Limited International BildingPCIis) - Partti Credit Institution(SYKB - i Yatirim ve Kredi Bakasi ndustridal
Investment and Credit Bak)TCZB - Turkiye Cumhriyet Zraat Bankasi
(iculal Bank of the Republic of Turkey)
FISCAL YFAR
January 1- December 31
FOR OMFCIAL USE ONLY
TURKEY
AGROILNDUSTRY PROECT
LOAN AND PROJECT SUNMARY
Borrower: Government of Turkey (GOT)
BEneficariebs: Participating Credit Institutions (PCIs), including theAgricultural Bank of Turkey (TCZJ), Balk Bank (BB), andIndustrial Investuent and Credit Bank (SYKB), and additionalbanks which may be deemed eligible at a later date, theMinistry of Agriculture, and private agroindustry enterprises.
Aunount: US$150 million equivalent
Terms: Seventeen years, including a five-year grace period, at theBank's standard variable interest rate.
ChQendi4R The Government would onlend the proceeds of the Bank loanTerms: (excluding $6.7 million for a fisheries development survey and
a marketing training component) to the PCIs. Aside from $0.5million for technical assistance to the PCIs (to be onlent onthe same terms as the Bank loan), proceeds of the loans to thePCIs would be onlent to private agroindustry subborrowers.Each loan to a PCI would be repayable on a schedule based onthe composite amortization of its subloans under the project.The subborrovers would be given an option to borrow either 'anlocal currency under the Foreign Exchange Risk InsuranceScheme (FERIS) or in foreign currency. For subloans in localcurrency, the Government would onlend Bank funds to PCIs onFERIS terms which include a 31 spread for the PCIs and avariable interest rate based upon the -verage rate ofthree-month Treasury Bills. The PCIs would onlend such fundsto subburrowers on the FERIS terms plus a 21 commission. Forsubloans in foreign currency, the Government would relend theBank funds to the PCls at the Bank interest rate, and the PCIswould onlend to subborrowers at this rate plus a spread of upto 4 p.a.
Fnanegb Plan: I/ IBRD US$150.0 millionPCIs " 57.5 N
GOT " 1.2Private Investors n 200.0
Total USJ =8.7 million
Economic Rate of Return: Not applicable. (Subprojects will have a minimum* ERR of 15X.)
1/ If grant cofinancing should become available for some of the technicalassistance components, IBRD funds would be reallocated for additionalagroindustry subloans.
This document has a restricted distribuion and may be used by recipiets only in the performanceof their offcial dutie Its contents may not otherwise be disclosed without Wodd Bank au_thontton.
MEMORANDUM AND RECOMMDATION OF THE POF THE lNTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
TO THE EXECUTIVE DIRECTORSON A PROPOSED LOAN
TO THE REPUBLIC OF TURKEYFOR AN AGROINDUSTRY PROJECT
1. The following memorandum and recommendation on a proposed loan tothe Republic of Turkey for US$150 million equivalent is submitted forapproval. The proposed loan would have a term of 17 years, including afive-year grace period, and the Bank's standard variable interest rate. TheGovernment would onlend the proceeds of the Bank loan (excluding $6.7 millionfor a fisheries survey and a marketing training component) to participatingcredit institutions (PCIs), including the Agricultural Bank of Turkey (TCZB),Balk Bank, and the Industrial Investment and Credit Bank (SYmB), and any otherbank which may be deemed eligible at a later date. Aside from $0.5 millionfor technical assistance to the PCIs, proceeds of the loans to the PCIs wouldbe onlent to finance private agroindustry investments.
2. Background. Agroindustry is the single largest subsector inTurkey's manufacturing sector, contributing 30% of manufacturing output, and19% of the sector's exports. Much of the agroindustry capacity was developedprior to 198G, during a period when Turkey was following, an importsubstitution industrial development strategy. Since these industries acquiredforeign debt at an overvalued exchange rate, assuming continuation of policiesof nominal domestic interest rates and import protection, many were unpreparedfor the stabilization policies of the 1980s based upon realistic exchangerates, positive interest rates, and a more open economy. High inflation hasled to severe decapitalization, while high real interest rates have caused ascarcity of investment capital, leading to a rapid increase in short-termdebt, high financial charges, and reduced profitability. Some enterpriseswere able to shift direction and regain a measure of financial health throughexporting. Agroindustry exports have grown at an average of 152 per year overthe past ten years, and exports of particular products (olive oil, fruitjuices, tomato paste, and fresh and processed fruits and vegetables) areprojected to grow at even higher rates. However, many other firms, did nothave the managerial ability in such areas as marketing and product quality, orthe financial strength to cope satisfactorily with the changed circumstances.Much of the industry is still facing serious financial problems, and is not ina position to take advantage of opportunities for exports and growth.
3. ProjectLekves. The agroindustry subsector in Turkey has thepotential to increase production for both domestic and export markets.Increasing output by increasing capacity utilization in existing plants is inmost cases more economic than by constructing new plants. Thus, the primaryobjective of the project is to provide the needed financial resources toexisting enterprises which, under stronger management, will revitalizeexisting capacity, thus increasing output, employment and foreign exchange
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earnings. However, construction of new capacity would also be an objective inthe case of products which offer prospects of high capacity utilization orwhere existing capacity is either unsuitable or has become obsolescent in theface of technological change.
4. ProjeIt DesKioon. The proposed project would have the followingcomponents:
(i) credit lines totalling $142.8 million equivalent to the participatingcredit institutions (PCIs) for on-lending as subloans to cover thedirect and indirect foreign exchange costs of private sectoragroindustry subprojects which are financially and economicallyviable. Permanent working capital in connection with investmentsubprojects would also be eligible for financing;
(ii) technical assstance to cartlatlngcredit istitutions to improve theircapability to carry out financial restructuring and subprojectappraisal;
(iii) technicalassistance to GOT to undertake a fisheries developmentsurvey to provide a basis for long-range planning for the developmentof the fisheries sector, including preparation of fisheriesdevelopment projects suitable for international financing; and
(iv) a olot market nttral thir amS to test and develop trainingtechniques in international marketing, with emphasis on agroindustryproduct marketing.
PCIs would include initially the Agricultural Bank of Turkey (TCZB), Balk Bank(HB) and the Industrial Investment and Credit Bank (SYKB). Other PCIssatisfactory to the Government and the Bank may be added at a later date. Thesubborrowers would be given an option to borrow either in local currency underthe Foreign Exchange Risk Insurance Scheme (FERIS) or in foreign currency.For subloans in local currency, the Government would onlend Bank funds to thePCIs on FERIS terms which include a 3 percent spread for the PCIs and avariable interest rate based on three-month Treasury Bill rates. The PCIswould onlend such funds to the subborrowers on the FERIS terms plus a 2Scommission. For subloans in foreign currency, Government would relend fundsto the PCIs at the Bank interest rate and the PCI. would onlend tosubborrowers at this rate plus a spread of up to 4% p.a. Government wouldalso onlend $0.5 million equivalent for technical assistance to the PCIs atthe Bank interest rate. The loan also includes $6.7 million for a fisheriessurvey and marketing training program. If grant financing is obtained forthese components, these funds would be reallocated for additional agroindustrysubloans. The fisheries survey would be implemented by the Miniptry ofAgriculture. Establishment of a private foundation for export t:-aining isunder active consideration and this proposed foundation could be a suitableimplementing agency for the pilot marketing training component. Arrangements,satisfactory to the Bank, for carrying out the marketing training componentwould be made by December 31, 1989. The total cost of subproject investmentsand the technical assistance components is estimated at about $409 millionequivalent with a foreign exchange component of about 37%. A breakdown ofcosts and the financing plan are shown in Schedule A. The loan is expacted to
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be committed in three years and disbursed in six years. Amounts and methodsof procurement and disbursements and the disbursement schedule are shown inSchedule B. A timetable of key project processing events and the status ofBank Group operations in Turkey are given in Schedules C and D, respectively.The Staff Appraisal Report (No. 7653-TU) dated May 10, 1989, is beingdistributed separately.
5. Agreed Actions. At negotiations agreement was reached with theGovernment of Turkey and the PCIs on the following: (a) Subborrowers would begiven the option of borrowing in local currency (at a variable interest ratetied to the three-month Treasury Bill rate) under the Foreign Exchange RiskInsurance Scheme (FERIS) or in foreign exchange; (b) each PCI would have tosubmit annual audit reports including certification that it is in compliancewith the following financial covenants: (i) a minimum collection ratio of 75%on medium and long-term loans (except for TCZB which would t-ve a minimumratio of 702 for loans made prior to January 1, 1989 and 85% for loans madethereafter); (ii) a minimum debt-service-cover ratio of 1.1 to 1 for SYKB and1.2 to 1 for other PCIs; (iii) a cap4*sl adequacy ratio as required by theBanking Law for commercial banks or a 10 to 1 maximum debt-equity ratio fordevelopment banks, and (iv) provisions for bad and doubtful debts as requiredunder the Provisions Decree of May 1988; (c) Subproject and enterpriseeligibility criteria would include (i) a minimum economic rate of return of15% in real terms; (ii) a debt-service coverage ratio averaging at least 1.5during the five year period following the start of commercial operations andno less than 1.2 during any year; (iii) a minimum owners/stockholders equityinvestment of 351 of assets at the time of application for the subloan, andowners/stockholders provision of at least 501 of the cost of the proposedinvestment; (iv) maximum Bank financing of $5 million for any subproject and$10 million for any enterprise and (v) compliance with environmental standardsacceptable to the Bank; and (d) Government would provide (i) additional equityresources to TCZB to reach a ratio of net worth to total assets of at least 62by the end of 1991 and (ii) payment to TCZB by December 31, 1989 for arrearson Government guaranteed loans to sales cooperatives.
6. Initial allocations for subloans would be $71.4 million to TCZB,$42.8 million to SYXB and $28.6 million to Ralk Bank. The Government wouldretain the right to reallocate funds among PCIs (i) if reviews of commitmentsand pipeline of loans indicate that a PCI may be unable to utilize itsremaining allocation; (ii) if additional PCIs should become eligible toparticipate in the project; or (iii) if a PCI should be unable to carry outits obligations under the Project Agreement or the Subsidiary Loan Agreement.The Bank would be prepared to consider adding additional PCIs to the Projectsubject to their meeting the financial requirements in paragraph 5 (b) aboveand their having adequate agroindustry appraisal capacity. Signing ofSubsidiary Loan Agreements, acceptable to the Bank, between the Governsmet andat least two PCIs would be a condition of effectiveness. Discontinuation ofthe former fixed-rate FERIS would also be a condition of effectiveness. Nodisbursement would be made with respect to a particular PCI until a SubsidiaryLoan Agreement acceptable to the Bank had been signed with the PCI.Conclusion of a Subsidiary Loan Agreement could take place only for a PCIwhich had made adequate provisions for non-performing loans in accordance withTurkey's banking law. PCIs would submit to the Bank for approval fullappraisal reports for subloans above a free limit specified for each PCI, and
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a summary description of the project and certification of eligibility forsubloans below the free limit.
7. Benefits. Agroindustry is the largest single subsector in Turkey'smanufacturing sector and plays a major role in the Turkish. economy bygenerating employment, providing a market for agricultural output, fosteringentrepreneurship, reducing regional and income disparities and producing forexports. The proposed project would help revitalize the subsector, therebycreating additional employment, income and foreign exchange earnings. Theproject, by providing funds to several PCIs on equal terms, would alsofacilitate increased competition among PCIs for providing improved services toagroindustries. The Bank ioan would not only provide long term resources tothe participating credit institutions for on-lending to agroindustrialenterprises but also technical assistance to improve their capabilities toap;- aise agroindustry projects and carry out financial restructuring ofdistressed enterprises. The technical assistance component would also providevaluable training programs for those responsible for product development andmarketing in agroindustrial enterprises, and help provide the informationrequired to support agroindustry development in fisheries. It is anticipatedthat the project would finance about 250 agroindustry subprojects resulting inabout US$400 million of incremental investments. On the basis of comparableinvestments in earlier years, it is estimated that the project could createabout 20,000 new full-time jobs. The subprojects financed are expected to befairly labor intensive, with a cost per job usually not exceeding US$25,000.While many of the smaller agroindustry units financed are not expected to bedirect exporters themselves, their products would be han"led by establishedexporters and export trading companies. All of the agroindustry units wouldbe processing local raw materials with direct linkages with the agriculturalsector. Many of the workera employed by these units would be less skilled ornew entrants into the labor force.
8. Rationalefor Bank nvolvement. The proposed project would supportthe Bank's strategy for (i) assisting the development of the agriculturalsector and increasing its commercial orientation; (ii) supporting Turkey'sefforts to increase exports; and (iii) strengthening financial intermediariesand increasing their areas of competition. Government and the Bank are inagreement on subsectoral development objectives and on the strategy to achievethem, i.e., liberalization and concomitant enterprise restructuring. TheBank's unique contribution to this process would be as a catalytic agent inbringing together within the project the parties with a clear stake in thefuture of the subsector (the agroindustry enterprises and the participatingbanks), defining their roles in subsectoral development and promotingimplementation of key elements of the subsector strategy, i.e. financialrestructuring and development of the marketing function. The Bank's supportof the project is critical for the active and growing involvement of thePCIs. The proposed project would increase Turkey's foreign exchange earningsand output, without requiring significant Government budgetary outlays.
9. Risks. Continuation of high inflation and economic disequilibriumcould jeopardize the performance of the agroindustry subsector. TheGovernment has committed itself to a package of reforms, which are expected toreduce inflation and the fiscal deficit. The Government and the Bank areclosely monitoring implementation of the reform program. Other risks include
the possible slow pace of enterprise restructuring by the PCIs and theinability of enterprises to appreciate and adopt focussed marketingstrategies. Training and consultant input are provided to reduce theserisks. There may be initial resistance from potential borrowers to the switchfrom fixed to variable interest rates under the FERIS scheme, but theadvantages of the new arrangements should become evident if the Government'santi-inflation policy induces downward movement in these rates.
10. Recommendations. I am satisfied that the proposed loan would complywith the Articles of Agreement of the Bank and recouxend that the ExecutiveDirectors approve the proposed loan.
Barber B. ConablePresident
Attachments
Washington, D.C.May 10, 1989
r
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Schedule A
TURKEY
AGROINDUSTRY PROJECT4L
Estimated Costs'Z Local Foreign Total--- (US$ million)---
Subproject Investments 257.2 142.8 400.0
Technical Assistance Components 1.5 7.2 8.7
Total 258.7 150.0 40&7
Financing Plan Local Foreign Total- (US$ million)
Bank 0.0 150.0 150.0
Private Sector 200.0 0.0 200.0
PCI 57.5 0.0 57.5
GOT _ 1.2 0.0 1.2
Total 250.7 150.0 408.7
oL. If grant financing should become available for the fisheries survey andmarketing training components (estimated foreign exchange cost $6.7million equivalent) corresponding amounts from the Bank loan would bereallocated for agroindustry subloans, with consequent increases infinancing amounts from PCIs and Private Investors.
Total 50.0 367.2 5.5 1.0 408.7(50.0) ( 95.0) (5.0) (150.0)
Note: Figures in parenthesis are the amounts financed by the Bank.
International shopping, based on at least three responsive quotations./2 For contracts below $3 million, local and international shopping based on
at least 3 quotations would be used; otherwise limited internationalbidding would be required.
'3 According to the Bank Guidelines for use of consultants issued in August1981.
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Disbursements
Category Amount 2US. M
Subloans
Machinery and Equipment, ) 142.8 100% of CIF cost of directly(including associated ) imported items, 502 of ex-factoryservices) ) cost of locally manufactured items,
) 70S of imported items purchased) locally.)
Imported raw materials ) 1002 of CIF cost (up to subloan) allocation for permanent working) capital)
Civil Works ) 30%
Technical Assistance
Equipment for fisheries 2.2* 100% of CIF cost of directlysurvey imported items; 1002 of ex-factory
cost of locally manufactured items;752 of cost of imported itemspurchased locally.
Consultants 5.0* 1002 of foreign expenditures150.0
* Some equipment may instead be included as part of consultants' contract.
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Schedule C
TURKEY
AGROINDUSTRY PROJECT
Timetable of Kev Proiect Processing Events
(a) Time taken to prepare: 10 months
(b) Prepared by: Government with Bank assistance
(c) First IB3tD mission: January 1988
(d) Appraisal mission departure: November 1988
(e) Negotiations: March 30-April 5, 1989
(f) Planned Date of Effectiveness: August 31, 1989
(g) List of relevant PCRs and PPARs: Agricultural Credit andAgroindustries Project(PPAR No. 6812)
Fruit and Vegetables I(PPAR No. 4265)
t
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Schedule )Page 1 of 2
STATUS OF 8ANK GROUP PPERATIONS IN TURKEY
A. SToA ENTR OF §WA S AND IDA CREDITS La(As ofMarch 31 198)
Loan Fiscal Amount (I millions! /kNumber Year Harrower Pur£ose Anlk lm Undlpguuis
Sixty six loans, six B-Loansand fourteen credits fully disbursed 4343.75Lk 196.15 Lk1742-TU 1979 Republic of Turkey Grain Storage 79.00 22.211985-TU 1981 Republic of Turkey Fertilizer Rationalization 104.00 8.091998-TU 1981 State Investment State Industrial Enterprise
Bank Finance 70.00 3.782094-Tu 1982 Republic of Turkey Erzurum Rural Development 40.00 14.792159-TU 1982 ISKI Istanbul Sewerage 88.10 1.482322-TU 1983 TEK TEK III 98.00 14.492399-TU 1984 Republic of Turkey Industrial Training 36.80 4.812400-TU 1984 Republic of Turkey Technical Assistance for SEEs 4.65 2.232405-TU 1984 Republic of Turkey Agr.Extension and Research 72.20 38.512433-TU 1984 Republic of Turkey IAEE Irrigation 115.30 71.292439-TU 1984 Republic of Turkey Second Highway 186.40 44.612535-TU 1985 Republic of Turkey Third Ports 134.50 84.782536-TU 1985 Republic of Turkey Industrial Schools 57.70 38.272585-TU 1985 Republic of Turkey Agric. Sector Adjustment In. 300.00 50.312586_TU 1985 TEK Fourth TEK Transmission 142.00 124.352602-TU 1986 TEK Power System Operations Asst. 140.00 125.182647-TU 1986 Republic of Turkey Small & Medium-Scale Industry 100.00 14.132650-TU 1986 TEK Elbistan 0 and M 10.00 0.082655-TU 1986 Republic of Turkey Kayraktepe Hydropower 200.00 185.242663-TU 1986 Republic of Turkey Drainage & On-Farm Develop. 255.00 234.832714-TU 1986 Republic of Turkey Finncial Sector Adj. Loan 300.00 5.242739-TU 1987 Republic of Turkey Railways I 197.00 128.922750-TU 1987 Republic of Turkey Sir Hydropower 132.00 92.882776-TU 1987 Republic of Turkey Non-Formal Voc. Training 58.50 55.292818-TU 1987 Republic of Turkey Imir Water Sup. & Sewerage 184.00 172.922819-TU 1987 Republic of Turkey Cukurova Urban Development 120.00 109.842856-TU 1987 Republic of Turkey Energy Sector Adjust. loan 325.00 108.722888-TU 1988 ISKI Istanbul W. Supply 218.00 188.042901-TU 1988 TSKB, SYKB, and
Republic of Turkey Ind. Export Dev. 300.00 180.872922-TU 1988 Republic of Turkey Ind. Training II 115.80 104.992964-TU 1988 Republic of Turkey FSAL II 40fl00 200.00
Total 8927.70 196.15 2431.17of which has been repaid l"Z.Ol 26 92
Total now outstanding 7240.69Amount sold 3.55
of which has been repaid
Total now held by Bank and IDA L& 7237.14 169.23Total undisbursed 2431.17
LA The status of the projects listed in Part A is described in a separate reporton all Bank/IDA financed projects in execution, which is updated twice yearlyand circulated to the Executive Directors on April 30 and October 31.Me Not of cancellations.
Lc Prior to exchange adjustments
05/01/89
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Schedule DPage 2 of 2
STATS OF BAK RO OPERATIONS IN TURKEY
B. STATEMENT OFC S IMNS(As of March 31, IMh)
Fiscal Amount $ millionsYear O.li.atr Type of Business Loan Eauitv Total
Projects fully closed out 65.64 8.1v 73.82
1964/67/69/ TSK8 DRC 60.00 4.7/ 64.7772l3nl5n677/80/8371n2970m Vik kiing I Pulp and Paper 2.50 0.82 3.32
82/83
1970/86/87 ACS Glass 20.79 1.96 22.751971/6/ NASAS Aluminum 8.56 1.50 10.0683/841079/80/82/84/85 ISAS Motor Vehicles & Access. 8.85 2.34 11..91986 Can Elyaf Fiber Glass 7.94 - 7.941979/81/89 Trakya Cam Glass 87.20 7.13 94.3383/641980 MENSA Textile and Fibers 4.00 - 4.001981 Kirklareli
Cam SanayiiA.S. Glass Tableware 12.95 - 12.95
1982 H.A.N.motors Motor Vehicles & Access. 7.89 - 7.89
1984 Pinar Food and Food Processing 3.90 - 3.901985 WAS Motor Vehicles & Access. 6.47 - 6.471986 Silkar Turin Yatirum Tourism 5.81 - 5.81
ve Isletmelari A.S.1986 Eska Turian ve Tourism 9.08 - 9.08
Ticaret A.S.1987 Guney Sanayi ve Ticaret Textiles 16.48 - 16.48
