Turkey - Irrigation Rehabilitation and Completion Project

29l : CIRCULATINGJI Copy, RESTRICTED 14 t6, . uTING COPt < ~~~~Report No. P -1I01 1 TO BE RETURNED To REpORTS Kept This report is for official use only by the Bank Group and specificaUy 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 It may not be published, quoted or cited without Bank Group authorization.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 report. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO TURKEY FOR AN IRRIGATION REHABILITATION AND COMPLETION PROJECT January 6, 1972  I:iTERNATICAL DEVELOPMENT ASSOCIATION REPORT AND RECaENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO TURKEY FOR AN IRRIGATION REHABILITATION AND CONPLETION PROJECT 1. I submit the following report and recommendation on a proposed de- velopment credit to Turkey for the equivalent of $18 million on standard IDA terms to help finance a project for the rehabilitation and completion of existing irrigation works in three areas. PART I - I'nTODUCTION 2. The level of Bank Group operations in Turlcey in the past has been largely influenced by the almost chronic balance of payments difficulties and the heavy external debt-service burden, the limited IDA resources which could be made available to Turkey and to some extent difficulties in pro- ject preparation. After 1968 the Bank and the Turkish authorities dis- cussed the basis for a major increase in the level of lending. This was regarded as primarily dependant on: firstly, improvements in Turkey's general capacity to borrow a substantial part of its needs on Bank terms; secondly, an intensification of measures to improve foreign exchange earnings and particularly encourage exports by giving high priority to the allocation of resources and incentives for export-oriented projects and introducing a number of reforms in the system of trade and payments; and, thirdly, a significant expansion in the capacity to select and prepare pro- jects in priority areas. By the end of 1970, marked progress was made in these fields, culminating in the devaluation of the Turkish lira in August 1970 and in the introduction of a stabilization program. The Government recognized the need for Turkey to reach external viability within a reason- able time period and gave high priority to the expansion of exports as the principal means to achieve this. It also recognized the need for more effective use of all resources, modernization of the organization and machinery of government and rationalization of the existing industrial infrastructure. Parallel with these developments, the Bank Group stepped up the level of assistance in project preparation with special attention being given to selection criteria, institution building and provision of suitable arrangements for implementation. As a result, the amount of Bank/ MDA lending reached $114 million in FY 1971, thus exceeding the level achieved in the five preceding years. 3. In the course of the joint efforts made by the Government and the Bank to prepare projects, the continuing importance of agriculture was recognized as well as, within this sector, the over-riding need to make greater use of the substantial investments already made in major irrigation  works. It was felt that an improvement in the extent and efficiency of water utilization on existing irrigation projects and the development of high priced crops and high yielding varieties which this would permit, would serve to demonstrate the benefits which could be achieved by allo- cating greater financial and technical resources. At the same time, this would provide a basis for re-examining the machinery for coordination and implementation of the several ministries and agencies involved. It is in this context that the irrigation rehabilitation and completion project has been included in the Bank's lending program. The project is expected to be the basis for a number of similar Bank Group operations in Turkey. 4. A summary statement of Bank Loans, IDA Credits and IFC Invest- ments is attached as Annex I. Past Bank Group operations in the Turkish agricultural sector have focused on the Seyhan irrigation project (Loan 38-TU and Credit/Loan 143/587-TI), the execution of which has been satis- factory after some initial difficulties. More recently one Credit (236- TU) and one Credit and Loan (257/762-T'U) have been made to finance re- spectively a Dairy Development Project and a Fruit and Vegetable Export Project. The effectiveness dates of the five loans and credits made in FY 1971 had to be postponed beyond the original dates due to delays in fulfilling some of the conditions. However, four of the loans and credits, namely the Dairy Project (Credit 236-TU), Education I (Loan 748-TU), and the two power loans, TEK I(736-TU) and Cukurova IV (775-TU), have now been declared effective. The delays are mainly due to the absence, within the Turkish administration as presently organized, of a substantive, rather than formal, coordinating link between the Bank and the Government. This function was previously carried out by the State Planning Organization which, following the change of Government in March 1971 and subsequent administrative reorganization, lost its central coordinating role, and has not so far been replaced in this regard by arn other body. The Bank has made known to the Government its concern about this situation. 5. Execution of previous projects has been satisfactory on the whole with the exception of the Keban Transmission Lines Project (Loan 568-TU) where progress has been interrupted by a dispute between Turkish Electricity Authority (TEK) and the principal contractor concerning payment of the in- creased cost of civil works following devaluation of the Turkish lira. This matter has been put to arbitration. Meanwhile TEK has terminated the con- tract and is arranging to complete the work themselves. It is expected that the transmission lines will be completed in ample time to receive power from the Keban hydroelectric project, which is itself delayed. 6. Five Bank/IDA operations are planned for FY 1972 amounting to $153 million. In addition to the irrigation rehabilitation and completion pro- ject, loans or credits are contemplated for livestock development, a steel plant, a fertilizer plant and for urban development in Istanbul. Negotiations for a $75 million loan for the expansion of the Erdemir Steel Plant are pro- gressing but some arrangements with other lenders for the project (USAID and Eximbank) and with the Government have still to be completed. The livestock  - 3 - project ($15 million Credit), the fertilizer project ($23 million Loan) and the Istanbul Urbanization project ($25 million Credit/Loan) have been appraised and are expected to be negotiated in the first half of 1972. 7. A Bank mission which visited Turkey in April 1970 identified the need for rehabilitation and completion of a number of existing irrigation schemes in Turkey. As a result, the Government submitted a list of schemes which they consider suitable for Bank financing from which the present pro, ject was selected. The project was appraised in May/June 1971. Negotia- tions were held in Washington in November 1971. The Turkish delegation was headed by Mr. A. T. Gul, Chief Commercial and Economic Counselor at the Turkish Embassy, Washington, D.C., and included as representatives of the Government agencies responsible for the construction of irrigation works and on-farm development respectively, Mr. Sayin, Deputy Director General of Devlet Su Isleri (DSI) and Mr. Erkenci, Director General of Topraksu. PART II - THE ECONG4Y 8. A report "The Development Prospects of Turkey" (EMA-30a) dated February 1, 1971 was distributed to the Executive Directors on February 14, 1971. This was updated by a memorandum entitled "Current Economic Position and Prospects of Turkey"' (EMA-40a) dated July 19, 1971, which was distri- buted on July 26, 1971. The next economic mission is scheduled for spring 1972. A country data sheet is attached as Annex II. 9. Following the 1969 elections, which confirmed the Justice Party in power, the Government under Prime Minister Demirel faced a constant erosion of its majority in the National Assembly. At the same time, there was growing violence by extremist groups of students and unrest among workers, which continued through 1970 to the early months of 1971. In March 1971, a new "above-party and reformist"' government was formed under Prime Minister Erim following the intervention of the Armed Forces and the resignation of the former government. The new government's program called for the restoration of law and internal security, the reorganization of the state administration, more rational management of the economy and long overdue structural reforms. Growing opposition from Parliament and the private sector to the reform proposals brought about the resignation of a large group of technocratic Ministers in December 1971. A new coali- tion Government, headed again by Prime Minister Erim, comprises a large number of representatives of the political parties and fewer technocrats. Its new program contains substantial parts of the Prime Minister's first policy declaration in April 1971. It reiterates the national urgency of executing major structural reforms, emphasizes the importance of the sur- vival of democratic procedures in Turkey and appears to be conciliatory both in tone and in the choice of key Ministers towards Parliament and the private sector.  -'4- 10. The report "The Development Prospects of Turkey" identified the principal obstacles to development and noted that devaluation and the stabilization program introduced in August 1970 reflected the Government's aim to introduce a new external orientation of the economy and an effort to develop exports and accelerate progress towards external viability. The report pointed to the need to improve the situation of public finance and to make more effective use of the budget as a fiscal instrument in con- trolling the level of aggregate demand; to slow down the planned rate of growth of public investment and improve its composition; to liberalize the external trade regime and promote international competitiveness; and to embark on an urgent program of rehabilitation of the principal deficitary State Economic Enterprises (SEEs). These issues are not new; they have been the central issues in Turkey's economic development for many years but are of special importance at a time when Turkey aims at further rapid growth and progress towards external viability. 11. The Memorandmum on "The Current Economic Position and Prospects of Turkey" reviewed economic developments since devaluation and described the March 1971 Government program. The main thrust of the program was towards long-term structural reforms which were unlikely to bear fruit in less than 2-3 years. The wide-ranging reforms were to include: land and edu- cational reform; far-reaching reorganization of the Government administra- tion, including SEEs and control of external trade; reform of tax adminis- tration and extension of tax coverage to agricultural incomes; nationalization of private enterprise in mining, petroleum and forestry industries; and strip- ter enforcement of the conditions for foreign capital investment, including insistence on Turkish majority participation. 12. While law and order were restored rapidly, the first Erim Government was able, in its eight months of office, to translate few of its long-range policies into detailed measures and decrees, although it was possible to in- crease substantially the prices of various SEEs to make them financially viable. The Government was unable to bring under control a number of critical short- term difficulties, such as a serious fiscal imbalance and a rapid price in- crease, both of which were adversely affected by the financial implications of the ambitious Personnel Reform introduced by its predecessor. The private sector's attitude was affected by what were believed to be anti- business trends in the Government's policies and, consequently, economic activity did not pick up as rapidly as expected. In the Prime Minister's December 1971 statement more emphasis is placed on the role of the private sector which is to enjoy the same importance as the State sector. Many of the features of the original program of April 1971 affecting the private sector have been modified and shoul& help allay the fears of both domestic and foreign private investors.  13. Economic grmoth in 1970 was influenced by factors associated with civil unrest, growing balaiice of paynrents difficulty and devaluation as well as by unfavorable weather for agriculture. GNP grew by 5.6 percent at con- stant prices, compared with an average of 6.6 percent in earlier years. In- dustrial growth slowed down to 3 percent, compared to 10 percent in 1969, and agricultural output rose by only 1 percent. However, other sectors grew in the aggregate at 7 percent. In 1971 the economic situation has been favored by a remarkable improvement in the overall balance of payments position following the devaluation and by the record agricultural output for the 1970/71 crop year. Despite these favorable factors, which will probably result in a record growth rate of about 8 percent for the year as a whole, investment activity has only grown slowly from the low point reached at the time of devaluation and industrial growth has only recently begun to pick ip steam again. 14. The trade deficit for 1971 has increased but this has been partly offset, following devaluation, by the increase in workers' remittances to a record level of $273 million in 1970 and an estimated $400 million for 1971. The current account deficit was also financed by a substantial increase in public capital inflow and some private foreign investment. As a result, the net foreign assets of the Central Bank rose to about $230 million at the end of September 1971 compared with about $10 million at the end of 1970 and a net liability at the end of 1968. Following the changes introduced in the relationship between the major world currencies in December 1971, Turkey established a central rate of 14 Turkish Lira to the U.S. dollar (instead of the previous parity of TL 15 to the dollar). 15. The growth in domestic savings, which had been improving during earlier years, slowed down in 1969 and more noticeably in 1970, the rate of increase dropping to 2.5 percent in 1970 compared to 14 percent in 1968. Budgetary resources in particular have been severely strained, mainly be- cause of the rise in civil, servants' salaries under the 1970 Personnel Re- form Law. The public investment target for 1971 (10 percent above 1970) is unlikely to be achieved. In the private sector investment has also continued to lag and deposits in the banking sector have grown faster than credits. Finally, due to increased government salaries and wage settlements, the effects of the 66 percent devaluation on import prices, and substantial price increases in the products of State Economic Enter- prises, wholesale prices increased by 21 percent between August 1970 and August 1971. 16. The economic situation in 1971 can be regarded as a transitional one, reflecting the first effects of major adjustments in exchange rate, domes- tic prices and salaries. Other major factors not likely to be repeated are probably once-for-all changes, such as clearing of the backlog of imports and changes in the Personnel Reform Law, which have led to a jump to a new  - 6 - plateau. However, the basic economic problems restricting growth remain unchanged and the need for structural reform is as strong as ever. More- over, the immediate economic situation is severely strained by the heavy budgetary cost of the Personnel Reform Law, by a possible continued drain on resources arising from the financial situation of some of the SEEs and by the need to step up investment expenditure. At the same time, sub- stantial inflationary pressures exist from the side of wages and output prices. In view of these inflationary pressures and budgetary diffi- culties, the Government will need to take energetic but delicately balanced measures to contain aggregate demand whilst at the same time mobilizing and injecting additional resources into the economy through efforts to step up investment activity in both the public and private sectors. The Government program attaches special importance to the allocation of re- sources required for efficient utilization of existing capacities, in- vestment in quick yielding projects and concentration on completing on- going ones. It reiterates the necessity for renewed efforts to promote exports and calls for a major increase in taxation to balance the 1972 budget and finance an increase of 30 percent in the level of public in- vestment expenditures in 1972. These measures, which will put the strengtl of the new Government to a major test, should be supplemented by an overall income policy and effective machinery for consultation between the Govern- ment, employers and labor to exercise some control over wage and price increases. 17. Following successive debt rescheduling and arrangements for debt relief, and the record level of workers' remittances in 1970, the debt service ratio was lower than expected, amounting to 16 percent of total foreign exchange earnings. In the longer term, if the country enjoys political stability and if the Government intensifies its efforts to promote exports and can push through at least a modified reform program, the economic prospects remain promising. Turkey will continue to need substantial amounts of external assistance. But even with a projected gross inflow of external assistance in excess of $400 million per year and gradually hardening terms, the debt service burden can be expected to fluctuate around 15 percent of exports of goods and services, in- cluding workers' remittances, provided exports and workers' remittances continue to grow as projected. PART III - THE AGRICULTURE SECTOR 18. A report entitled "Agricultural Policies and Problems" was dis- tributed to the Executive Directors as Volume III, Annex 1, of the report "The Development Prospects of Turkey"t referred to in paragraph 8 above.  - 7 - 19. Although agriculture contributes only about 30 percent of the na- tional product it provides some 65-70 percent of total employment, supplies most of the raw materials for industry, and accounts for the bulk of Turkey's export earnings. Recent performance has been disappointing as agriculture has lagged behind the economy and generally fallen short of the First and Second Plan targets. In the First Plan period 1963-67, agriculture value added expanded at 3.4 percent annually. The Second Plan, 1967-72, calls for an increase of 23 percent in gross value added by agriculture, equivalent to a growth rate of 4.2 percent annually, but the actual rate was only 1.9 percent in 1968 and close to 1 percent in 1969 and 1970. Given the shortfall in the first three years, it is ex- tremely doubtful whether the 1972 target can now be reached. However, the crop year in 1971 was unusually good and with reasonably favorable conditions in 1972 it should be possible to achieve an annual growth rate of 3.0 to 3.5 percent for the Second Plan period. 20. The cultivation of cereals accounts for about 70 percent of the total cropped area and for over 30 percent of the value of production. Livestock accounts for 27 percent of the value of production, industrial crops (mostly cotton, tobacco and sugarbeet) for 17 percent, fruit and vegetables, which have expanded rapidly in recent years, about 15 percent, whilst forestry and fishing account for about 1.5 percent and less than 1 percent respectively and miscellaneous items for 9 percent. The rate of growth of wheat production appears to have been about 2 percent per year, well below the 2.6 percent population growth, despite the recent intro- duction in some areas of new high yielding varieties as part of a techno- logical package, including intensive fertilizer use and improved cul- tivation. Other cereals appear to have increased even more slowly, at 1.5 percent per year. In the case of cotton, its rapid expansion has been favored by the increasing use of irrigated land as well as the existence of profitable export markets. Until 1962 industrial crops, as a whole, increased at about 4.3 percent per year but since then appear to have been increasing at about 7 percent per year. In sharp contrast in performance, livestock production appears to have virtually stagnated in recent years, whilst forestry, with its rich resources, remains perhaps the least de- veloped major sub-sector due to the fact that the nation's extensive forests have not been effectively harvested. 21. Several attempts have been made to introduce land reform since 1945 but without success. The Government which held office in March-December 1971 gave central importance to the subject in its reform program. It is not yet known whether the new Government will maintain or amend the key features of the draft bill which is under parliamentary discussion. The main target of its proposals are the very small number of large holdings above 20 ha. which occupy over 30 percent of the land. The equally im- portant problem of land fragmentation appears to attract less attention. Very little serious land consolidation has been done, although a regulation  -8- exists requiring land consolidation to be carried out on major government irrigation schemes. During negotiations for the present project, the Bank has expressed its concern over the lack of progress on consolidation, and it is expected that this subject will be given attention in the land re- form legislation. 22. An important factor contributing to the expansion of output and offsetting in part losses due to adverse weather conditions has been the extension of the irrigated area. Apart from the large increase in cotton production, the provision of water has led to some expansion of citrus and other fruit production and could lead to a major increase in vegetablo production, provided profitable market outlets can be developed, and to an increase in production of fodder crops which in turn would contribute to an expansion of livestock production. An ambitious program of construc- tion of major dams and irrigation works has been in execution for many years. This has been undertaken efficiently but insufficient attention has been given to the need to bring these projects into full productive use by allocating corresponding resources to on-farm development and other supporting services and strenghening proportionately the responsible Government agencies. Thus, while Turkey's investments in irrigation works in the past have been substantial, their contribution to overall agricultural growth has been relatively small, due mainly to under-utilization, with re- sultant losses to the economy. 23. Turkeyts agricultural policy shows little change over the last two decades although the country has substantially increased investment in agriculture and increased the availability of inputs. Ihe main conditions for progress, i.e. technological innovations of particular application to Turkey and the improvement in resources allocation and incentives, are still hampered by continued agricultural price support payments which at their present levels are no longer economically justified; by inadequacy of appli.ed research and extension work; by limited and somewhat ineffective credit facilities; and by an insufficient utilization of the natural resources available in livestock and forestry. Moreover, much of the investment has not yet been brought to successful fruition. Finally, most of these short- comings reflect the lack of a modern institutional structure centered on a strong Ministry of Agriculture capable of formulating and implementing con- sistent long term policies, and the difficulties of ensuring the coordina- tion of effort and consistency of policies of other departments and agencies affected. 24. Agriculture's generally poor performance can be improved by approp- riate changes in organization and policy, with greater concentration on high priority activities. Priorities could include: (a) completion and full utilization of existing irrigation projects while limiting the start of new large-scale irrigation to fully integrated projects; (b) in- creased wheat production, especially on the Anatolian plateau,  - 9 - and integrated rural development projects in the poorest parts of Eastern Turkey; (c) increased production of fruit and vegetables for export; (d) development of livestock including dairying, fattening, feedstuffs and marketing; (e) reduced production of the surplus commodities, tobacco and tea, and a more rational program for sugar, through revision of price policies and development of alternative products; (f) greater utilization of forest resources; and (g) expansion of credit facilities, provision of new high yielding and disease resistant seed varieties, adequate and timely supplies of fertilizers and other inputs, and expansion of farmer training and extension services. 25. The Government is now giving priority to the completion of ongoing projects in most fields. The present project represents the first serious attempt to apply this policy in the irrigation sector. By adhering to this policy in future and adopting the complementary measures called for, in particular the creation of a unified structure of control and priority allocation of resources for on-farm development and extension services, it would be possible for Turkey to fully develop and bring into effective use some 60-80,000 ha. per year of land connected with irrigation works either constructed but incomplete or under construction. Further Bank Group lending is planned to assist this policy through subsequent irrigation re- habilitation projects and the extension of the irrigated areas in the Cukurova region (financed under earlier Bank/ImDA projects). In addition, Bank assistance will focus on livestock, fruit and vegetable and forestry development as well as on agricultural credit which will be the subject of a comprehensive survey financed under the 1971 Fruit and Vegetable Export Project. Finally, while the crucial program for increased wheat production has so far received adequate assistance from other foreign donors, little has been done to prepare a program for rural development in the poorest parts of Turkey, where most of the large-scale emigration to cities ori- ginates; the Bank plans to study with the Government the possibility of formulating such a program suitable for Bank Group assistance. PART IV - T1E PROJECT 26. A detailed description of the proposed project is given in the Report entitled "'Appraisal of an Irrigation Rehabilitation and Completion Project" (PA-108a) dated January 4, 1972 which is being distributed separately. A Development Credit and Project Summary is attached as Annex III. 27. The project is situated in the following three areas of Asian Turkey: (a) Silifke, on the Mediterranean coast about 400 km south-east of Ankara near the town of Silifke. The Project Area includes about 5,000 net ha of irrigated land along both banks of the Goksu river. Rice and peanuts are the main summer crops, with some oranges and other fruits, vegetables and sesame.  - 10 - (b) Koprucay, on the Mediterranean coast about 360 km south-west ofAnkara and about 40 km east of the city of Antalya. The Project Area includes about 22,000 net ha. of irrigable lands that can be served by gravity and pumping from the main canals heading at the existing Eoprucay Diversion Dam. Cnly about 9,000 ha are presently under irrigation, with cotton and rice the main irrigated crops. Dry crops are mainly winter cereals, mostly wheat. (c) Tokat, on the Anatolia Plateau about 350 km north-east of Ankara and some 100 km from the Black Sea near the town of Tokat. The Project Area includes about 23,000 net ha. lying along both sides of the Yesilirmak river and consists of those lands that can be served by gravity from the existing diversion dam of Tolmakkaya in the Qmala plain and Gumenek dam in the Kazova and Turhal plains. About 12,000 ha. are presently under irrigation and the main irrigated crops are winter wheat, sugar beet and orchard with small areas of vegetables, maize and vine- yards. Under dry farming conditions, wheat is the prevailing crop. 28. The proposed project, which is estimated to cost $36.6 million equi- valent, is intended to rehabilitate and complete the water distribution network and on-farm development on the above irrigation schemes, now parti- ally serving about 26,000 ha., which would be expanded to serve a total area of about 50,000 ha. Additional features of the project include the improvement of roads, provision of adequate credit and improvement of extension activities. The project provides for equipment for construction, operation and maintenance of irrigation and drainage facilities and for use in land levelling, for improvement of Topraksuls workshops at Antalya and Sivas and for vehicles for extension agents. The project also includes the use of Consultants to assist Tbpraksu and the Extension Service in organi- zing their work and allows for training abroad of selected DSI, Topraksu and Extension Service employees. 29. Project Administration. The coordinated action of four Goverrment Agencies is required to impIement the project. (a) DSI - State Hydraulic Works (an agency of the Ministry of Energy and Natural Resources) would be responsible for constructing all project irrigation and drainage works down to the farm unit; (b) Topraksu - Soil Conservation Agency (an agency of the Ministry of Village Affairs) would be responsible for carrying out all on- farm development works including land levelling, installation of tile and surface drainage, improvement of soil structure and re- habilitation of existing roads in each Project Area;  - 11 - (c) Extension Service (under the Ministry of Agriculture) would be responsible for educating farmers in modern and improved methods of cultivation in the Project Areas and bringing about the required change in cropping patterns by expanding the areas under higher value crops; and (d) Agricultural Bank of Turkey (an autonomous government agency under the Ministry of Commerce) would be responsible for pro- viding agricultural credit. 30. In order to achieve the coordination of these various activities, the Turkish Government would be required to establish, within three months of the date on which the Development Credit Agreement becomes effective, a separate coordinating committee for each of the Project Areas on which these Agencies would be represented. As far as the Extension Service is concerned, where special emphasis on coordination is required, the Govern- ment would appoint a local coordinator for extension in each Project Area. Similar arrangements have proved effective in implementing the Seyhan pro- ject. 31. Consultants. Both Topraksu and the Extension Service would require outside assistance in organizing their work. The Government has therefore agreed to appoint a firm of consultants who would provide two experts for Topraksu to train equipment operators, layout a sequence of machine opera- tion and supervise related work, plus two experts for the Extension Ser- vice to train extension workers and provide guidance in establishing a coordinated extension effort in the Project Areas. These experts would be stationed at Koprucay and Tokat. The third Project Area at Silifke would be assisted by the consultants now serving the Seyhan project who can assume this task without difficulty. DSI has had considerable ex- perience in constructing, operating and maintaining irrigation and drainage projects in Turkey and is considered capable of processing work on the project without outside assistance. However, if during the course of the work outside assistance does appear necessary, the Association would re- quest the Government to retain consultants also for DSI. 32. Procurement. Equipment, materials and vehicles required for the project and to be financed out of the proceeds of the Credit would be pro- cured on the basis of international competitive bidding. Local manu- facturers would be allowed a 15 percent preference or the import duty, whichever is lower, in bid comparison. Certain items of equipment, materials and vehicles which can be manufactured locally have been reserved for local procurement under normal government bidding procedures and would be financed entirely by the Goverrment.  - 12 - 33. Some civil works would be carried out without international com- petitive bidding where coordination is required between work on the project and the need to maintain water services, or where work of a specialized nature is to be undertaken. This work would be carried out wherever possible by local contractors and to encourage bidding for land leveling and tile drainage work, bids would be invited for work on blocks of at least 1,000 hectares in each project Erea. IWhere local contractors for any work could not be found, DSI and Top- raksu would undertake the work through force account, the expenditure on which is estimated at $6 million, of which about $2.7 million would be financed from the proposed credit. All other work would be carried out under contract following international competitive bidding procedures. To the extent prac- ticable, all major works on each project would be put into one contract in order to attract international competitive bidders but each contract would be divided into different sections which could be bid separately, thus making it possible for domestic contractors to bid. DSI and Topraksu have agreed to submit, within six months of the date of signing of the Development Credit Agreement, a schedule of work to be undertaken on each of the Project Areas with recommendations for specific work to be carried out by contract or by force account. 34. Project Costs and Disbursements. The total cost of the project (including contingencies) is estimated at $36.6 million equivalent, of which $12.3 million would be in foreign exchang e. A detailed breakdown of costs is given in Annex III. The proposed Credit of $18.0 million would cover about 50 percent of the estimated project cost, including the total foreign exchange component, plus $6.7 million equivalent of local expenditure (pri- marily part of the cost of civil works). Financing of part of the local ex- penditure is recommended for high priority projects such as this, since the shortage of public savings has become an increasingly critical constraint on investment in Turkey, particularly since the August 1970 devaluation. More- over the financing of local currency expenditures for this project is ex- pected to encourage the government agencies concerned to step up preparation and implementation of the sizeable backlog of rehabilitation schemes which might otherwise continue to suffer from insufficient budget allocations. 35. The Credit would be disbursed against the full cost of equipment, materials and vehicles, the full foreign exchange cost of consultant ser- vices and training and 46 percent of the cost of civil works. Turkey would finance the balance of the local currency cost of the project, estimated at $18.6 million, the incremental annual recurrent cost of the project estimated at $0.8 million, and make available adequate agricultural credit to farmers ir. the Project Areas, where credit demand is expected to double from $4 million to $8 million per year.  - 13 - 36. The cost estimates for the project in the Appraisal Report are based on the exchange rate of TL 15 to the US dollar in force prior to the establishment of the central rate of TL 14 to the US dollar in December 1971. While the overall impact of this change on the project is ex- pected to be minimal, it is difficult to forecast what the detailed effects of this and of the other recent currency changes will be. No major impact on the foreign exchange cost of the project is expected in view of mutually offsetting factors. As regards local costs, the share to be financed by IDA may be somewhat reduced, but not significantly, and the Appraisal Re- port estimates have not therefore been revised. The disbursement per- centage for civil works will be adjusted later on as may be necessary in the light of revised cost estimates to ensure that disbursements will continue until all expenditures for such works have been made. 37. Water Charges. DSI would make arrangements for the setting of water charges levied on farms in the Project Areas at levels which will provide revenues at least sufficient to cover all operating and maintenance costs and provide for the recovery of as much as practicable of the in- vestment costs, taking into account farmers incentives and capacity to pay, together with reasonable interest thereon. These arrangements are expected to be introduced following the review of water charges now being undertaken by the consultants appointed under the Seyhan Project, and will be subject to periodic review at intervals not exceeding five years. 38. Economic benefits. Most of the incremental cotton produc,ion from the project is expected to be exported, and there would be an annual increase of some US $4.4 million equivalent in foreign exchange earnings; in addition a portion of the vegetable production would probably be ex- ported. At full production, about five years after completion of the pro- ject, the annual net value of production from the three Project Areas, valued at international prices, is estimated at TL 260 million (US $17.3 million), compared to TL 119 million (US $7.9 million) at present and a projected value without the project of TL 137 million (US 9.1 million). The incremental net value of production due to the project would thus be TL 123 million (US $8.2 million).  - 14 - 39. The average life of project facilities has been assessed at 50 years. Over this period the economic rates of return are estimated at 19 percent for Koprucay, 18 percent for Silifke and 12 percent for Tokat. 40. Some 11,500 farm families would benefit directly from the project. The annual incremental income available to typical farmers, after operation and maintenance costs, is estimated at TL 1,,490 per ha. at Tokat, where climatic conditions restrict the opportunity for double cropping, TL 2,580 per ha. at Silifke, and TL 3,520 per ha. at Koprucay. Farm sizes vary in each Project Area; however, taking a typical farm size of 3 ha. at Silifke, 4 ha. at Tokat and 6 ha. at Koprucay, annual incremental incomes would amount to TL 7,730, TL 5,990 and TL 21,110 respectively. 'The project would require some 14,300 man years or twice the present employment opportunity. It is expected that this increase would be met by family labor except at Koprucay where seasonal hired labor would be needed for planting and harvest of cotton, rice and tomatoes. The project would also generate additional employment opportunities in processing agricultural products, such as in cotton gins, canning industries and sugar factories. PART V - LEGAL INSTRUMENTS AND AUTHORITY 41. The draft Development Credit Agreement between the Republic of Turkey and the Association, the Recommendation of the Committee provided for in Article V, Section i (d) of the Articles of Agreement and the text of a Reso- lution approving the proposed credit are being distributed to the Executive Directors separately. The draft Development Credit Agreement conforms to the normal pattern for credits for irrigation projects in Turkey. 42. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Association. PART VI - REC1MMENDATION 43. I recommend that the Executive Directors approve the proposed credit. Attachments Robert S. McNamara President December 30, 1971  ANNEX I page 1 STATEiDENT OF BANK LOANS AND IDA CREDITS TO TURKEY AT NOVEMIBER 30, 1971 Loan or Amount Credit (US$ millions) Undis- Number Year Borrower Purpose Bank IDA bursed Seven loans and six credits fully disbursed 70.7 56.3 - 59 TU 1964 Republic of Turkey Second Cukurova Power - 24.0 1.0 568 TU 1968 Republic of Turkey Keban Transmission 25.0 - 7.3 Lines 587 TU 1969 Republic of Turkey Seyhan Irrigation 12.0 - 11.8 Stage II 143 TU 1969 Republic of Turkey Seyhan Irrigation 12.0 4.6 Stage II 589 TU 1969 TSKB Industry 25.0 3.6 623 TU 1969 Republic of Turkey Third Cukurova Power 11.5 - 5.9 713 TU 1970 TSKB Industry 40.0 - 36.8 236 TU* 1971 Republic of Turkey Intensive Dairy - 4.5 4.5 748 TU 1971 Republic of Turkey Education 13.5 - 13.5 257 TU** 1971 Republic of Turkey Fruit and Vegetable - 15.0 15.0 762 TU** 1971 Republic of Turkey Fruit and Vegetable 10.0 - 10.0 763 TU 1971 TEK Power Transmission 24.0 - 24.0 775 TIJ 1971 Republic of Turkey Fourth Cukurova Power 7.0 - 7.0 Total (less cancellations) 238.7 111.8 of which has been repaid 49.0 Total now outstanding 189.7 Amount sold 1.2 of which has been repaid 0.7 0.5 Total now held by Bank and IDA 189.2 111.8 Total undisbursed 119.9 25.1 145.0 * Made effective on December 23, 1971 ** Not yet effective  ANNEX I page 2 STATEF gNT OF IFC INVESTIMNTS IN TURKEY AT NOVEMBER 30, 1971 Commitments (Net of Exchange Adjustments) Calendar (US$ millions) Year Company Loan Equity Total 1963 Industrial Development Bank of Turkey - 0.92 .0.92 (TSKB) 1966 Sifas I (Nylon yarn) 0.90 0.47 1.37 1967 Industrial Development Bank of Turkey - 0.34 0.34 (TSKB) 1969 Industrial Development Bank of Turkey - o.42 0.42 (TSKB) 1969 Sifas II (Nylon yarn) 1.50 0.43 1.93 1969 Viking I (Pulp and paper) 2.50 o.61 3.11 1970 A.C.S. (Glass) 10.00 1.58 11.58 1970 NASAS (Aluminium, Steel and Foil) 7.00 1.30 8.30 1970 Sifas III (Nylon yarn) 0.75 - 0.75 1971 Viking II (Pulp and paper) - 0.05 0.05 Total 22.65 6.12 28.77 Less cancellations, sales, and repayments 4.47 0.37 4.83 Now held 18.18 = 23.94  ANNEX II page 1 TURKEY - COUNTRY DATA Area 780,000 sq. km. Population 35.5 million Rate of growth 2.6 percent per annum Density 46 per sq.km. Gross National Prodiut 1970 (current market prices) TL 144.5 billion Annual Rate of grawth (constant prices) 1963-67 = 6.9% 1969 = 6.4% 1970 = 5.6% GNP at factor cost (1970 current prices) TL 127.7 billion GNP per capita at factor cost (1970) TL 3,597 / Industrial Origin of NDP (% of NDP at constant prices) 1962 1970 Agriculture and forestry 39.7 29.6 Manufacturing, mining and power 16.2 19.5 Construction 6.3 7.4 Transport and Communications 7.2 8.0 Trade 8.1 9.0 Housing 4.8 5.5 Government services 9.7 11.1 Financial institutions and other services 8.1 9.9 Expenditure of GNP (% of GNP at constant prices) Private Consumption 74.1 70.7 Public Consumption 15.4 12.7 Gross fixed investment 14.8 19.5 Net imports of goods and services 3.6 .3.8 Net factor income from abroad -o.6 0.9 Gross National Saving 10.5 16.6 1969/1970 Public Finance (Billion TL) 1969 1970 Growth Rate % Current Receipts 21.6 28.6 32.4 Current expenditures 15.6 20.3 30.1 Capital transfer 3.4 4.8 41.2 Surplus, net of transfer 2.6 3.5 34.6 Investment expenditures 6.9 7.0 1.4 2/ $257 at the new central rate of TL 14 = US$1.  ANNEX II page 2 1969/1970 Money, Credit and Prices (Billion TL) 1969 1970 Growth Rate % Total money supply, including sight and saving deposits 30.1 35.1 16.6 Total central credits and advances 12.9 14.6 13.2 Total commercial bank credits 33.2 37.2 12.0 Change of wholesale price index 6.o% 5.8% Change of consumer price index (Istanbul) 4.3% 7.6% Balance of Payments (Viillion US$) 1962 1969 1970 Imports of goods 622 801 948 Exports of goods 381 537 588 Net invisibles (including NATO receipts) - 1 43 188 Current Account Deficit -242 -221 -172 Commodity Concentration of Exports (%) 1962 1970 Cotton 17 29 Tobacco 25 13 Hazelnuts 17 15 Fruits and vegetables 7 9 External Public Debt (million US$) 1969 1970 Total outstanding debt (end of calendar 2,196.7 2,442.9 Debt service year) 134.1 160.4 Debt service ratio (% of exports of goods) 25 27 (% of exports of goods & services, gross) 20 22 (% of goods & ser- vices, incl. workers' remittances) 16.7 15.6 IBRD/IDA Operations (I!illion US$) 1968 1969 1970 Nov. 1971 (Cumulative - end of Calendar year) Total loans - IBRD 98.4 146.9 186.9 241.4 - IDA 80.7 92.7 92.7 112.2 Repayments - IBRD 39.9 42.2 45.1 49.0 Total loans outstanding - IBRD 55.8 102.0 139.1 189.7 - IDA 80.5 92.5 92.3 111.8  ANNEX II page 3 r!TF Position (1Million US$) 1968 1969 1970 Sept. 1971 Quota 108 108 151 151 Net IFI? position 76 64 112 110 SDR drawings - - 18 16 Foreign E:cchange Reserves (11ill ion US$) Gold and convertible foreign exchange, gross 123 245 431 561 Net foreign assets - 6 13 10 230 Inconvertible currencies 92 125 151 135 Exchange Rate December 1971: Turkey established a central rate of US $ 1 = TL 14.00 August 9, 1970 to December 1971 US $ 1 = TL 15.00 Prior to August 9, 1970: US $ 1 = TL 9.00 Social Indicators Unit 1950 1960 1965 1970 Population Growth rate % 2.7 2.9 2.5 2.6 Urban Population growth rate % 6.2 5.4. School enrollment: % school 33.0 47.0 54.0 56.0 o Primary and age Secondary adjusted popln Literacy rate % adult 32.0 38.0 popln Unemployment rate % labor force 9.0