Turkey - Railway Project

CIRCULATING COPY TO BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL 'BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1144-TU REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO TURKEY FOR A RAILWAY PROJECT April 6, 1973 This report was prepared for official use only by the Bank Group. ]t may not be pubLished, quoted or cited without Bank Group authorization.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.  Currency' Unit Turkish Lira (TL) US$ 1 TL 14.00 TL i a US$ 0.07 TL 1,000 = us$ 71.n4 TL 1,000,000 = US$ 71,429 Turkish Fiscal Year - March 1 to February 28.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMNENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO TIE TURKISH STATE RAILWAYS FOR A RAIL1WAY PROJECT 1. I submit the following report and recommendation on a proposed loan to the Turkish State Railways for the equivalent of US$47 million to help finance a project for the rehabilitation and the technical and adminis- trative modernization of the railways. The loan would have a term of 25 years, including 5 years of grace, with interest at 7-1/4 percent per annum, and would be guaranteed by the Republic of Turkey. PART I - THE ECONOMY 2. A report entitled "Current Economic Developments and Prospects of Turkey" dated September 18, 1972 was distributed to the Executive Directors on October 25, 1972 (R72-236). A country 1ata sheet is attached as Annex I. 3. Following a long period of stability, internal political tensions have appeared in the last two years. Student disturbances and unrest among workers occurred in 1970 and early 1971, and the armed forces called in March 1971 for the resignation of the Demirel cabinet and for the implementation of the land, tax, educational, administrative and other reforms prescribed by the 1961 Constitution. An "above-party and reformist" government was formed under Prime Minister Erim, and martial law was introduced. In its eight months in office, the Government largely re-established law and order, and introduced some administrative changes. It also raised prices charged by several State Economic Enterprises and presented several reform bills to Parliament. However, it was not able to translate its long-range economic policies into detailed measures and decrees. Growing opposition from Par- liament to some of the administrative changes and reform proposals brought about the resignation of a large group of ministers in December 1971, and a new coalition government, headed again by Prime Minister Erim, was then formed. 4. The second Erim government had greater political party representation, but its attempt to push through modified reform measures again met with oppo- sition in Parliament. A mining reform bill and a moderate land reform bill were introduced in Parliament, but little was done to further educational re- form or to reorganize the State Economic Enterprises. Prime Minister Erim resigned in mid-April after his request for "government by decree", intended to speed up the process of reforms, was turned down by the political parties. A new government drawn from three parties and non-parliamentarians and headed  - 2 - bv Prime Minister xelen wns formed in 'fay 1972. It declared its aim to pursue the reform measures and prepare for national elections in the fall of 1973. During 1972, despite the attempts of the Telen Government little progress has been made in passing the reform bills in ParliameTit. The underlying ten- sions between some of the political narties and the armed forces came to the fore in March 1973 in connection with the end of the term of the President of the Republic and the election of a new President. After some delay, agree- ment was reached and former Admiral Fahri Koruturk was elected President April 6, 1973. 5. While long-term economic policy issues have recently become one of the main causes of political tensions, growth in Gross National Product in the last decade has been high and continuous, averaging about 6.8 percent per year in the period 1962-1971. In the same period, gross investment in- creased substantially, with its share in GNP rising from 15 to 21 percent. Although total consumption increased considerably, gross national savings increased at a much faster rate, their share in GNP rising from 11 to 20 percent. However, in 197n and 1971, in spite of a big jump in workers' re- mittances, the share of gross national savings has not risen substantially due to relatively poor public savings, and the share of investmenit also in- creased more slowly due to pressure on public resources (para. 8). 6. The main growth sectors in the last decade have been industry, power and construction. This reflected the development strategy during the first and second five-year plan's (1962-67', 1968-72), which gave highest priority to industrialization. Industrial output grew by about 10 percent per annum with textiles, machinery and equipment, steel and chemicals providing the main impetus. But this rapid'growth, mainly to meet domestic demand and replace imports, was. insulated from foreign competition. Other rapidly growing sectors were transport, trade and financial services. The impact of large investments in agriculture was slow, however, and agricultural nroduction' had a trend growth rate of about 3 percent per annum only, with large fluctuations from year to year depending on weather conditions. As a result of the relative growth rates, the shares of industry and trade in GDP rose to 23 and 10) percent respectively, and that of agriculture dropped to 27 percent, compared to 17,. 8 and 37 re- spectively in 1962. Growth in the last two years has been above average. In 1971, GNP increased bv 9% in rea-l terms, with value added in agriculture in- creasing by more than 9% thanks largely to an excel-lent harvest, a sharp rise' in workers' remittances and continued industrial growth. En 1972, GNP in- creased by about 7.5%, with value added in agriculture remaining.at about the record 1971 level but an estimated 12% growth in industry, fast growth in transport, construction and trade and another sharp rise in workers' remittances. 7. The balance of payments situation was characterized in 1967-70 by increasing trade deficits, and a strict system of import contrbls leading to delays and shortages of essential imports and, consequently, tb underutiliza- tion of production capacity. The overvalued official exchange rate was changed in August 1970 from TL 9 to TL 15 per USS, revised to TL 14 in December 1971  3- and has remained at TL 14 after the February 1973 dollar devaluation. This, together with associated stabilization measures and a rapid rise in workers' remittances helped to improve the situation dramatically. Workers' remittances increased sharply, from about $140 million in 1969 to $470 million in 1971. Commodity exports and tourism receipts also increased markedly. These im- provements led to better availability of essential imports of investment goods, raw materials and parts, and to rebuilding of stocks. The improvement in the balance of payments continued in 1972. Commodity exports increased by about 30 percent reaching $885 million due to agricultural exports (main- ly tobacco, hazelnuts, raisins and fruits and vegetables) increasing by over 20 percent, and industrial exports increasing by about 65 percent, from $145 million in 1971 to about $240 mlllion. The large increases in industrial exports were in food and beverages, textiles, cement, hides and leather pro- ducts and petroleum products. Imports also rose by over 30 percent to reach about $1560 million, leading to a substantially larger trade deficit than 1971. However, workers' remittances jumped by about 55 percent, reaching about $730 million and the overall result has been a continuing increase in gross official foreign exchange reserves, which stood at $1485 million at the end of January 1973. Net foreign assets, which were negative in 1966-68, had risen to almost $600 million in November 1972. 8. The budgetary situation has been dominated in the last decade by the need to control the rapid growth of public expenditures.. Although tax revenues have grown faster than GNP, their share rising from 12.9 percent in 1962 to 17.6 percent of GNP in 1971, the increases in tax revenues have been more than offset by the rise in current expenditures and transfers. The over- all budget deficit has grown since 1968 and was particularly large in 1971 when the full impact on current expenditures of public salary increases under the 1970 Personnel Reform Law was felt. The Treasury had to have growing re- course to the Central Bank for short-term advances and to other short-term borrowing. The difficulties facing public mobilization of resources led to public investment expenditures falling short of targets, and to an actual decline in public fixed investment in real terms in 1971. The pressure on public resources has continued in 1972, and the growth of public development expenditure probably suffered as a result. 9. The financial results of the more than 100 State Economic Enter- prises (SEE's) have been consistently poor. The SEE's now account for about 20 percent of the fixed investment in the economy and about 10 percent of value-added; however, in each year since 1966 a third of the 28 major produc- ing SEE's on average have lost money. Since 1969 the average rate of return on investment for these largest producing SEE's has been less than 3 percent despite subsidized interest rates averaging about 4 percent.. The low profits of the SEE's have necessitated increasing budgetary transfers, which amounted to TL 3.5 billion in 1971. The railways, by far the biggest loser, accounted for about a third of that amount. 10. In the period 1967-70, while available resources increased, a more rapid growth of expenditures led to inflationary pressures in the economy,  resulting in an average increase in wholesale prices of about 6 percent per annum. Inflationary pressure became particularly strong in 1971 when whole- sale prices rose 16 percent and cost of living by 20 percent. The pressures came mainly from the demand side due to substantial increases in public salaries and industrial wages, higher remittances from abroad and larger agricultural incomes in a year of record output. At the same time controlled prices of public industrial enterprises and support prices of major agricul- tural products were also raised, and prices of imported goods increased sharp- ly as a result of both devaluation and the rise in world export prices. The pressure on prices has continued in 1972, fueled by a continued rise in receipts from remittances and exports, as well as by the resumed growth of investment, both private and public. Wholesale prices rose by 15 percent in 1972. In these circumstances, better mobilization of resources by the public sector, a balance between the claims of the public and private sectors on investment funds, further liberalization of imports and avoidance of short term borrowing by the Treasury from the Central Bank are needed, among other measures, to contain the inflationary pressure. 11. For the longer term, the continued political uncertainties have meant that the planned reforms, e.g. administrative, tax, educational and land reforms, and reorganization of SEE's have on the whole not progressed very far. In July 1972, a "preliminary measures law" for land reform was passed which provided for preparatory measures, but the land-reform bill itself has yet to be passed by Parliament. Administrative reform of the SEE's and upgrading their executive and labor skills have still to be achieved. This is particularly important to prepare Turkish industry for competition, that will arise from association with the EEC. In agriculture, although sub- stantial irrigation investments have been made in the past and the government rightly gives high priority to completing on-going projects, several long-term problems remain. The Anatolian plateau and the eastern part of Turkey are considerably less developed than the coastal regions and land tenure problems are serious in some regions. Surplus stocks of tobacco, tea and hazelnuts; have accumulated and there is need to modify price support and other policies to divert resources from those surplus crops for which Turkey has no compara- tive advantage. Some progress has already been made in shifting land from sugarbeet to sunflower, feedgrains and other crops and recent high export demand has also helped to somewhat reduce the stocks of other products. 12. The employrment situation is also a matter of growing concern. Despite rapid industrialization and with the leveling off in agricultural employment, Turkey has not been able to absorb the increasing labor supply in the last decade. The labor force grew by about 420,000 a year between 1965 and 1970, of whom about 57,000 emigrated and 240,000 found employment on the domestic market, mostly in services and industry, leaving about 124,000 more unemployed each year. In the medium term, labor supply is expected to con- tinue growing by about 2.8 percent per year while demand outside agriculture is projected at about half the increase only. Speedy implementation of land reform would help to reduce the migration from rural to urban areas. In addition, labor-intensive projects need special emphasis in-the choice of industrial projects. However, even with these measures and continued emigra- tion, urban unemployment is likely to grow.  _5 _ 13. The problem of domestic resource mobilization by the public sector will remain a major constraint and will restrain the real growth of public investment in the Third Plan period (1973-77), especially if the savings strategy continues to be heavily dependent on public savings. If substan- tial increases in public savings are to be realized, then planned changes in the tax structure should be implemented at an early stage and the failure of State Economic Enterprises to generate sufficient surpluses should be a major concern of economic policy. In addition, it is essential to develop a capital market in Turkey to supplement the existing sources of long-term domestic borrowin,g. Proposals for a capital market bill are now being considered. A number of changes in the interest rate structure were intro- duced in early 1973, including reduction of the rate on short term lending and deposit rates, and higher interest subsidies to be paid for priority areas. A basic economic mission will visit Turkey this spring to review the Third Plan and some of the key policy issues mentioned above. 14. If the country maintains politically stable and if the government effectively carries out structural reforms in the areas mentioned above and promotes exports, Turkey may be able to maintain or even exceed a growth rate of 7 percent per annum. The Third Plan targets are an 8% GDP growth with a 9% and 6% growth per year of exports and imports respectively, and a total investment of about $3.7 billion per year. These targets imply a marginal propensity to save of 38% per ye&r (compared with 23% achieved dur- ing the Second Plan). The Plan projections seem to underestimate both the difficulty of raising the savings level and that of balancing the external account at a reduced level of net capital inflow. The emphasis on capital intensive industrial development will require more imports than targeted, especially since the import regime is likely to be more liberal than in the past. Gross official external capital requirements, which will be reviewed by a basic economic mission scheduled for May 1973, are tentatively estimated at about $400-500 million a year. 15. Total debt outstanding and disbursed was $2.2 billion at the end of 1971, of which all but 2 percent is public or publicly guaranteed. The average terms have been hardening in recent years and this trend is expected to continue. Of the total gross official external assistance of about $400 million in 1971, the Consortium members provided about $300 million. Of this, about $90 million came from the United States, $52 million from the European Fund, $26 million from the European Investment Bank and $37 million from the World Bank Group. The USSR disbursed $40 million. As a result of successive debt reschedulings and other arrangements for debt relief together with sub- stantially increased workers' remittances, the debt service ratio fell consid- erably after 1965, reaching 19.4 percent of exports of goods and non factor services and 12.9 percent of total foreign exchange earnings (including workers' remittances) in 1971. However, since the improvements in the balance of payments have occurred relatively recently, Turkey should continue to exercise great care in its external debt management, including restraint in its resort to suppliers' credit financing.  - 6 - PART II - BANK GROUP OPERATIONS IN TURKEY 16. During the lengthy period of chronic balance of payments difficulties before the 1970 stabilization program and devaluation of the Turkish lira Bank lending was only intermittent. Since then, the rapid improvement in the balance of payments and in creditworthiness stimulated by these actions has made possible a large increase and a new continuity in Bank/IDA lending, which in FY 1971 and FY 1972 amounted to $114 million and $173.3 million respectively. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of December 31, 1972, and notes on the execution of on-going projects. Project execution has generally been satisfactory although disburse- ments on several recent projects have been slow due to administrative problems. 17. Bank Group lending since 1970 has generally been aimed at assisting Turkey in the following broad development tasks: (a) the continued build-up of creditworthiness; (h) the external orientation and liberalization of the economy to improve extern'al and domestic competitiveness; (c) improved orien- tation of public investments with a view to ensuring the efficiency of invest- ments and bringing about a better balance between growth and employment and between the sectors and regions where development has reached a momentum of its own and those where it is lagging; and (d) institution-building in the public sector and especially among SEE's, where resource mobilization should and can be greatly improved. 1i. In the pursuit of these aims, a pattern of concentration in lending is evolving along sector and to some extent along geographic lines. In two sectors, agriculture and industry (including mining and development finance companies), past and planned lending is on a large scale and fairly broad in coverage of subsectors. In transportation, power and urban development, substantial lending focused on a few projects, particularly SEE's, will be continued or started. Geographical concentration has been designed to obtain mutually reinforcing benefits in related sectors and institutions and to support the objective of better rural-urban balance. Thus far, concentration has occurred mainly in the Istanbul region, with emphasis on urban develop- ment and industrial finance, and in the Cukurova region around Adana on the southern coast, with emphasis on power, irrigation and fruit and vegetables. A start has recently also been made on a complementary effort to psrovide rural inhabitants with an alternative to urban migration by lending for labor intensive projects such as the Second Livestock Credit which focuses on breeding, raising and fattening in Easterh and Central Turkey and by preparing, with the assis'tance of the IBRD/FAO cooperative program, an integrated rural development ptoject in rainfed areas of Central Turkey. 19. Several other projects financed by the Bank Group in recent years or presently under discussion may be mentioned to illustrate the effort to support the objectives discussed above. For instance, emphasis was placed on export-oriented sub-projects in the last two loans (713 and 873-TU) made to the Industrial Development Bank of Turkey (TSKB) and in the ioan and credit (762/257-TU) for the Fruit and Vegetable Export Project. Other projects for which lending is contemplated in coming years, especially for livestock,  -7- forestry and irrigation, are expected to enhance Turkey's ability to earn foreign exchange as well as spread development in rural areas. On the other hand, attempts to assist the expansion of tourism have not borne fruit, indi- cating some Government hesitation as to the importance to be given to tourism in Turkey's development strategy; as a result, tourism projects suitable for Bank consideration have not yet been put in shape, although an IFC investment in the sector has recently been presented to the Executive Directors. The objective of institution building has been pursued chiefly in agriculture (in- cluding agricultural credit), urban development of the Istanbul area and now in transportation. The Bank has furthermore been instrumental in bring- ing about a comprehensive reorganization of the power sector culminating in the establishment of the Turkish Electricity Authority (TEK) to which a loan (763-TU) was made in 1971. 20. In addition to the proposed Railway Loan, three other operations com- prise the Bank Group lending for FY 1973: a $40 million ninth loan (there has also been one IDA credit) to TSKB for lending to private industry was approved by the Board on December 21, 1972; a $44 million loan and $30 million credit for the multi-purpose Ceyhan Aslantas Project near Adana were approved by the Board on February 13, 1973; and a loan of $14 million for power in support of the Istanbul urban development which is being submitted to the Board at the same time as the present operation. Operations contemplated for FY 1974 include: a combined forestry and paper mill project in the Antalya area, which is being appraised simultaneously by the Bank and the European Investment Bank, which is expected to share in its financing; the lignite-based Elbistan power project for which the Government is also approaching several other potential lenders to finance the large foreign exchange costs; an integrated rural development project in a predominantly rainfed area of Central Anatolia; and a second irrigation rehabilitation project. 21. IFC has been active in Turkey, having participated in industrial investments for nylon yarn, pulp and paper, glass and aluminum. Total com- mitments so far amount to about $30 million. IFC is currently investigating new investment opportunities in various sectors, including special steel and tourism. PART III - THE TRANSPORT SECTOR 22. Since World W4ar II, Turkey's transport system has experienced a substantial transformation. The road network has expanded rapidly while railway construction has been essentially limited to the improvement of the existing system, and the leadership in traffic - both passenger and freight -- has been wrested from the railways by motor vehicles. By 1970, there were 48,000 km of all-weather roads compared with 24,000 in 1950, and 8,000 km of railway lines. Between 1950 and 197n, traffic on the roads grew at 11 percent per year, four times faster than on the railways. As a result, in 1970, 74 percent of the freight tonnage was moved by trucks, 25 percent by trains;  - 8 - and 90 percent of inter-city passengers were carried by buses and cars; only 7 percent by trains. The distribution of road traffic reflects the regional disparities in Turkish deVelopment, with about 70 percent of the trnffic concentrated in the five economic centers of Istanbul., Bursa, Ismir, Ankara and Adana. As most of the railway network was built in the twenties, it does not conform with the present pattern of economic flows, and distances are generally greater bv rail than bv road. About a third of the lines have a very lox traffic density. However, the railways have an indispensable role to play in Turkey's development as the most economic means of long-distance transportation for bulk commodities along the main trunk routes, particular- ly in the mining and agricultural sectors, and in. the movement of the raw materials for industry. 23. Turkey operates seven ports for international trade and also many minor ports. Traffic in ports increased by about 5.9 percent per year during the last decade, although the traffic handled by domestic vessels declined. Port facilities do not comply with the requirements of traffic demand, espe- cially as concerns mechanical installations, speed of operation, harbor depth, length of wharves, and storage capacity. The airport infrastructure is by and large adequate, and consists of two international airports used for scheduled domestic traffic. In 1970, the international airports handled about 70 percent of all aircraft movements and 75 percent of all passenger traffic, and the domestic airports the rest.. 24. During the First and Second Five-year Development Plans (1963-67 and 196fS-72) investment in the transport sector was kept at a rather low level (16 percent of total investment), and most of it went to the mainten- ance and upgrading of the existing road network. The amount of investment allocated to railways, about 20 percent of total investments in the transport sector, was not large enough to prevent the deterioration of the track and of the rolling stock. Transport coordination was keynoted in the text of Turkey's Second Plan, but little action has been taken to make it a reality. The Plan emphasized intermodal competition and commercial criteria for the operation of the state transport enterprises. These policies have not been implemented, however, essentially because of lack of administrative coordi- nation and the dispersion of authority among various government agencies: there are at present in the transport sector six state enterprises and twelve ministries or specialized government agencies dealing with policy, planning, pricing and operational management. During the period 1966-71, the state transport and communications enterprises have shown on the average the poor- est financial results of all public enterprises. The railways (TCDD) and the Maritime Bank, which is in charge of shipping, have incurred the largest deficits in the transport sector. The Ministry of Communications has broad statutory authority over the sector, but due to its poor organizational structure and shortage of qualified personnel, it has not exercised its power effectively. Responsibility for railway investment is still divided, with construction under the Ministry of Public Works and other railway investments under the Ministry of Transportation and Communication. The Bank has acted as executive agency for UNDP technical assistance studies on transport  coordination and on the railway investment program, which led to the project discussed below. In 1970, the Government created a transport coordination agency (called the Transport Coordination Project Center -- TCPC) within the State Planning Organization. TCPC was given authority to formulate sector-wide transport policy and to coordinate investment. However, within a few months of its establishment, it was largely shelved by the Government that came to power in March 1971. 25. The present Government has recently expressed renewed interest in ensuring an economic balance between railways and roads both in policies that affect traffic and operations and in the allocation of transport invest- ment funds. In August 1972 TCPC, now named TCA - Transport Coordination Agency - was relocated in the Ministry of Communications, and preparations were got underway for key studies on intermodal problems (see paragraph 43); the establishment of TCA with suitable authority was agreed on as a principal feature of the proposed loan. A six-year plan (1972-77) for the rehabilitation of the railways has been approved, calling for sharp increases in railway investments over Second Plan levels. The proposed loan is designed to help finance the 1973-74 portion of that plan. PART IV - TRr. PPOJECT 26. A detniled description of the proposed project is given in the report entitled, "Appraisal of a Railway Project Turkey", Report No. 12a-TU, dated April 6, 1973, which is being distributed separately. A loan and Project Summary is attached as Annex III. 27. The proposed project was appraised in March/April 1972 and a mission visited the country again in September 1972 to follow up the appraisal. Nego- tiations were begun in Washington in November; they were adjourned for con- sideration of a number of issues which remained unresolved, and were finally completed in March, 1973. The Turkish delegation was headed by Mr. Muammer Akinci, Chief Financial and Economic Counselor, Turkish Embassy, Washington, D.C., and included Mr. Sarp, General Manager of T.C.D.D. and representatives of the Government agencies which would be responsible for project implementation. General 2R. TCDD is a State Economic Enterprise, autonomous in day-to-day oper- ations, but under the general supervision of the Ministry of Communications and subject to specific Government authority in matters of major financial importance including, particularly, plans for investment and proposals for changes in tariffs of basic commodities. Apart from operating the railways, TCDD also runs five ports and three workshops for the manufacture of locomotives and rolling stock. Management is the responsibility of a Director General, who also serves as Chairman of a six-man Board of Directors. The Chairman and most of the members are appointed by the Cabinet.  - 10 - 29. Institutional Aspects. A number of problems in management and staffing have diminished the effectiveness of TCDD. In broad terms, the principal management difficulties have been over-centralization of authority, insufficiently clear responsibility at middle levels, and poor internal co- ordination. TCDD has made several responses to these problems. In 1971 it created a reorganization committee which is in the process of completing re- commendations for consideration by the Director General and the State Planning Organization. In parallel, it has requested the assistance of an outside management and reorganization study which the UNDP has agreed to finance in 1973. TCDD recently decided to strengthen the Research, Planning and Coor- dination Department, both in staffing and in authority. Finally, TCDD intends to establish a coordinating committee with the Director General as chairman in order to ensure effective implementation of the project. The experience gained by this committee should have a significant long-term effect on the quality of TCDD's management and may be one of the greatest benefits of the project. 30. Overstaffing, low executive pay and slow promotion, and lack of career training have been the key personnel problems. TCDD, in recognition of the burden of the personnel overhang left from past technologies, services, and wage structures, reduced total staffing by nearly 3,000 in 1970-71 and will prepare a plan for a further reduction through attrition of about 2,000 in 1973-75. To offset the handicaps of seniority promotions and low civil service pay scales, TCDD, within existing regulatidns, has begun to make merit jump promotions and plans to make salaries more competitive. An extensive training program exists and TCDD will review it to assure adequate opportunities to train executives abroad and employees at home. 31. Railway Lines, Equipment, and Cperations. The central physical characteristic of the Turkish railways is obsolescence, the result of neglect and underinvestment for several decades which is apparent in both lines and equipment. The condition of track is generally poor, renewals are behind schedutle, and breakage and derailment rates are high. Signalling systems are antiquated or non-existent except on the Ankara-Tstanbul ma4n line and in suburban services. Steam still accounts for 70-percent of train haulage, and old age keeps the availability rate of locomotives low. Nearly 20 percent of both freight and passenger cars are ready for scrapping. In spite of these impediments, TCDD's performance compares fairly well with that of other low- density railways, except for the average speed for freioht trains and turn-around times for wagons. One important problem requiring attention is that some 2,400 km of secondary lines, about 300 out of 1100 stations, plus miscellaneous freight and passenger services elsewhere in the system are definitely or probably uneconomic. 32. Traffic. Railway traffic in Turkey -- freight and passenger -- is ratlher concentrated, both geographically and functionally, and this pattern, wiich is likely to persist, bears heavily on the cost structure, profitability, ancl future course of development of TCDD. While passenger-kms roughly match  tonnage-kms, freight is three times as important in revenue terms, and its share will rise. Bulk items - notably iron ore, iron and other metals and ores, coal, cereals, fertilizer and fuel oil -- constitute about 70 percent of freight traffic, and their movement is heavily focused on the line connect- ing Istanbul, Ankara, and the iron mines near Divrigi in east central Turkey and on the branch line from Ankara north via the Karabuk Steel Mill to the coal mines at Zonguldak on the Black Sea. Heavy emphasis in the Third Five Year Development Plan on expansion of iron and steel production indicates that iron ore alone will grow to about 50 percent of freight traffic in 1980, and completion of the steel mill in Iskenderun on the Mediterranean Coast will bring the Divrigi-Iskenderun line into heavy use. Such rising demand for bulk transport (fertilizer is another important case), together with planned im- provements in railway efficiency, is expected to result in a near doubling of freight traffic by 1980 compared with about a one-third increase over the past seven years. 33. Forty percent of passenger traffic is suburban transit, which has increased by 80 percent since 1964 under the impetuis of road congestion and electrification. The rest is a stagnating main line traffic, largely con- centrated on the Istanbul-Ankara-Divrigi trunk route, which has survived rising competition from buses only because fares have been held constant during a period of steadily rising prices, and service has thus been provided at below marginal cost. Over the next five years a much slower expansion in commuter traffic is anticipated as suburban road projects are completed, and the uneconomic main line traffic is to be radically reduced by substantial increases in fares. Overall, a decline in total passenger traffic of more than one-third is foreseen by 1977. 34. Commercial Policy. TCDD's commercial policy, in practice determined by the Government and guided by the need to reconcile conflicting claims of special public Interests rather than by the criterion of market competitiveness, is inadequate both as to service and as to pricing. Collection and delivery arrangements are poor. The tariff system is complex, rigid, and not related to costs or to competing trucking rates. In 1968, a consultant study made recommendations for the introduction of (a) commercially-oriented, interrelated costing and pricing systems, and (b) improvements in service, and marketing, but they were not implemented. In connection with the proposed project, TCDD has reconsidered those recommendations and now plans to carry them out with further assistance from consultants with a view to establishing by May 31, 1974, a traffic costing system and revised freight and passenger tariffs based thereon, including provision for varying the tariff for any individual commodity category at such times and to such degree as TCDD deems advisable in response to changes in market conditions. 35. Financial Situation. After years of break-even and slightly pro- fitable operations, TCDD has sustained ever-increasing losses since 1959. TCDD's working loss for its railway activities (excluding its port opera- tions) reached in 1971 TL 1.1 billion; its operating loss including depre- ciation, expenditure on track maintenance costs and interest financed by  - 12 - the Government, was nearly TI 1.4 billion in the same year. These losses were the result partly of increasing operating costs - e.g. rising wzages and deteriorating equipment - and declining revenues, and partly of under- capitablization and unsatisfactory financing arrangements; between 1967 and 1971, in real terms, average per capita staff costs rose by 40 percent and average receipts per ton-kilometer declined by 25 percent in the absence of significant increases in rates and fares. Although a State Economic Enter- prise, TCDD for years was not fully reimbursed by the Government for its operating losses and had to resort to short-term borrowing. In 1971, a new law was approved under which the Government took over TCDD's debts to the State Investment Bank, increased its own capital investment in TCDD, converted TCDD's debt to the Treasury to equity, and undertook to finance annual track renewal costs. Despite the temporary relief provided by such measures, they failed to correct the basic shortcomings in TCDD's structure and operations and the recurrent causes for its financial deficits. TCDD's Investment Plan and the Plan of Action for Railway Development agreed upon in connection with the proposed loan are intended to initiate a far reaching program for the financial and physical rehabilitation of the railways. TCDD's Investment Plan and the Project 36. 1972-77 Investment Plan. With the assistance of consultants, financed under a UNDP project and in consultation with the Bank, which was the execut- ing agency for the project, the Government and TCDD began in 1968 a planning effort aimed at rehabilitation and reform which culminated this year in the preparation and approval of the 1972-77 TCDD Investment Plan. This Plan is intended to bring the railways up to the level of operating performance needed to sustain agriculture, mining, and heavy industry with efficient long-haul transport; to promote investment planning and operational policy-making'in transportation on a coordinated sector-wide basis; and through'these efforts to help bring to an end TCDD's enormous drain on the Government budget. It provides for an estLmated investment expenditure over the'six years of 85.41 million, of which abouit $157 million is in foreign exchange. Because of budget- ary stringency, the Plan was limited to uraent needs to assuire reasonable standards of safety and efficiency and is close to the minimum 'effort required to achieve basic rehabilitation by 1978. In view of this, TCDD has under- taken to review the Plan yearly in consultation with the Bank and not to make any increase or reduction of more than 10 percent in the funds allocated to any part of the Plan without the concurrence at the Bank. 37. The Project. The proposed. project is envrisaged as the first of a posslble series of three within the Plan and represents the investments in- tended for the period 1972-74. These are estimated at $223 million, including $67 milllon in foreign exchange. The principal items to be financed under the proposed first project aret renewal of about 8nn kcilometers of track and provision of related equipment; installation of signalling and telecommunications equip- ment; manufactuire by TCDD of about 150 diesel locomotives and shunters, 2,800 freighit wagons, and other equipment;'conversion of wzorkshops and depots to diese1-repair; improvement of administrative, water, storage and other support facilities; training; ar.d consultant services. 3I. Financin. of the total project cost of $223 million, the Government would contribute $158.5 million, including $13 million in foreign exchange for  - 13 - items already contracted for. The European Investment Bank has signed a loan for $23 million of which $16.1 million is to finance the import of components for the manufacture of 140 diesel locomotives. A French bilateral credit will finance about $1.? million in other complementary foreign exchange costs of those loconotives. The proposed Bank loan of $47 million would pro- vide $37 million to finance the foreign exchange cost of other imported re- quirements and $10 mi]lion to cover local costs. This much of a Bank con- tribution toward financing local currency expenditures seems justified in view of the small share which the Bank is taking of the overall project cost (21 percent), and the fact that the Turkish Government itself is cover- ing $13 million of other foreign exchange expenditures connected with the project. 39. Plan of Action for Railwqays Development. Throughout the period of preparation of the Investment Plan, the Government and TCDD recognized that physical rehabilitation of the railways had to be matched by financial res- toration, and that this required parallel actions to reduce costs through greater efficiency and to increase revenues through higher tariffs. In collaboration with the Bank and consultants, the Government and TCDD prepared an initial plan two years ago, from which emerged the present Plan of Action. 40. The central feature of the Plan is a series of annual targets for TCDD's working ratio 1/ which stood at about 2:1 in 1971. The Plan aims at reducing it to 1:1 in 1978, or, in other words, is designed to achieve break- even performance at the end of the Plan period except for capital costs and depreciation. To cover these latter items out of current revenues is too great a task for six years and must remain as a subsequent objective. To help achieve the annual targets for the working ratio, TCDD has incorporated in the Plan of Action for Railways Development, Schedule 5 of the Loan Agree- ment, a series of cost-saving actions. These include: (a) operating tar- gets for increased efficiency in locomotive availability and train movements, complete dieselization by 1974, and a plan for abandonment of uneconomic lines, stations, and services; (b) limitation of new investments to those that are economically justified; and (c) imnplementation of plans for reor- ganization, staff reduction, and training. 41. To increase revenues in support of the working ratio targets, the Plan of Action for Railways Development provides that TCDD will establish the costing system and the revised freight and passenger tariff system noted in paragraph 34 above, including adjustments in real terms. In this regard, TCDD has recently increased freight tariffs an average of 32.5%; will in- crease suburban passenger tariffs an average of 33% and main line passenger tariffs to which 1959 rates apply an average of 25% by April 30, 1973 and will raise the remainder of the main line tariffs by 15% before December 3i, 1973. 1/ All current costs other than depreciation and interest as a percentage of gross operating revenue exclusive of subsidies.  - 14 - 42. The Plan of Action for Railways Development also provides for consultant services on the following basis: (a) four studies to be financed by UNDP for: management and reorganization; abandonment or rationalization of uneconomic lines, stations, and services; construction of two new con- necting lines; and signalling investments; and (b) consultants to be fi- nanced by the Bank to assist in: commercial policy reform; track renewal and signalling investment; and dieselization. To permit a timely start on the latter group, the proposed loan provides for up to $100,000 in retroactive financing beginning January 1, 1973. 43. Plan of Action for Transport Coordination. The Covernment recog- nizes that rehabilitation of the railways will be successful and of lasting effect only in the context of an effort to rationalize investment decisions and operating policies throughout the transport sector. It has accordingly agreed on a Plan.of Action for Transport Coordination, which gives the Trans- port Coordination Agency (TCA) suitable structure and responsibilities and provides for the carrying out by TCA, with the assistance of consultants to be financed under a UNDP project, of priority studies on user charges, trans- port management information, import restrictions on transport equipment, and a consolidated transport policy statement. 44. Economic and Financial Benefits. The chief benefits of the pro- posed project are (a) to increase speed, promptness and safety of trains, (b) to augment the railways' capacity to carry traffic, and (c) to improve TCDD's competitiveness, particularly in relation to trucks on long hauls. Dieselization is expected to yield savings of up to 40 percent in operations and maintenance. Track renewal, signalling, and new rolling stock will also produce important, though not individually quantifiable savings. On the basis of the alternative investment and operating costs which would be in- curred in road transport if the 1972-82 railway investment program were not carried out and of the reduced railway working costs entailed by this pro- gram, the economic return over the lifetime of the project is conservatively estimated to be in the range of 16-26 percent, depending on variations in rail and road investment and operating costs and in traffic growth. 45. Under the proposed project and the 1972-77 TCDD Investment Plan, a number of financial benefits are anticipated. W4ith regard to financial structure, TCDD has agreed to revalue its assets and depreciation rates, undergo an annual external audit by the Inspectors or Accounting Auditors of the Ministry of Finance, and publish separate accounts for its ports and railways. The targets for the working ratio accepted by TCDD and the Government foresee complete elimination of the working deficit in 1978 and reduction of operating losses (which include capital costs) from an estimated TL 1.47 billion in 1972 to TL 0.66 billion in 1978. The debt- equity ratio would improve from 44/56 in 1971 to 25/75 in 1977. 46. Procurement. Goods financed by the proposed loan in the amount of about $41.5 million would be procured under the Bank Group's normal procedures for international competitive bidding, including the provision of a margin of preference for local, manufacturers of 15 percent or the applicable duty, whichever is lower. Certain local goods and services (ballast and labor for track renewal) would be provided under force account.  - 15 - 47. Disbursement. The proposed loan would be disbursed on the following basis: (a) for imported goods -- CIF landed costs; (b) for local goods from local bidders under international competitive bidding -- 100 percent of ex- factory cost; and (c) for ballast and labor for track renewal -- 65 percent of costs. PART V - LEGAL INSTRUMENTS AND AUTHORITY 48. The draft Loan Agreement between the Bank and the Turkish State Railways, the draft Guarantee Agreement between the Republic of Turkey and the Bank, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement, and the text of a Resolution approving the proposed Loan are being distributed separately to the Executive Directors. 49. The Executive Directors' attention is drawn to the following cov- enants: (i) In the Guarantee Agreement: (a) Section 3.02 related to the Government's undertakings to provide the funds needed by TCDD to carry out its Annual Investment and Financing Program, to enable TCDD to implement the Plan of Action for Railways Development and not to initiate the appropriation of funds for, or undertake, the construction of new railway lines until their feasibility has been demonstrated; and (b) Section 3.03 and Schedule I related to the Plan of Action for Transport Coordination. (ii) In the Loan Agreement: (a) Section 4.02 and Schedule 5 related to the Plan of Action for Railways Development; and (b) Section 4.05 regarding the review of TCDD's Investment Plan and Schedule 6 setting forth the latter. 50. I am satisfied that the proposed Loan and Guarantee Agreements would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 51. I recommend that the Executive Directors approve the proposed Loan and Guarantee. Robert S. McNamara President Attachments April 6, 1973   ANNEX I COUNTRY DATA - TURKEY Page J of 2 AREA POPULATION DENSITY 780,000 km2 37.2 million (mid-1972) 48 per Q Rate of Growth: 2.6% (from 1965to 1972) 140 per k2 of arable land POPULATION CHARACTERISTICS (1967) HEALTH (1967) Crude Birth Rate (per 1,000) 39.6 Population per physician 2,760 Crude Death Rate (per 1,000) 14.6 Population per hospital bed 560 Infant Mortality (per 1,000 live births) 153.0 INCOME DISTRIBUTION (1965-66, Istanbul) DISTRIBUTION OF LAND OWNERSHIP (1963) % of national income, lowest quintile 7 % owned by top 5% of owners 36 highest quintile 42 % owned by smallest 10% of owners 2 ACCESS TO PIPED WATER (% of population) ACCESS TO ELECTRICITY (1970)(% of population) % of population - urban 7, % of population - urban ) 7 - rural - - rural ) NUTRITION (1964-6,6) EDUCATION Calorie intake as % of requirements 110 Adult literacy rate % 46 (1965) Per capita protein intake (grammes) 77,9 Primary school enrollment % 77 (1968) .1- GNP PER CAPITA in 1971 : US $ 327 GROSS NATIONAL PRODUCT IN 197 1 ANNUAL RATE OF GROWTH C%. constant prices) US $ Mln. % 1962-65 1965-70 1971 GNP at Market Prices 11,939 100.0 5.0 7.1 8,9 Gross Domestic Investment 2,544 21.3 10.3 10.7 J 3.4 / Gross National Saving 2,422 20.3 14.3 9.6 11.1 Current Account Balance 122 1.0 8.8 Exports of Goods, NFS 853 7.1 .. 4.7 Imports of Goods, NFS 1,356 11.4 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1971 Value Added Labor Force V. A. Per Worker US $ Mln. % Mln. % US $ % Agriculture 3,083 26.6 9.8 66.2 316 40 Industry 2,710 23.4 1.5 10.1 1,d07 231 Services 5,797 50.0 3.5 23.7 1,656 211 Unallocated .__ Total/Average 11,590 100.0 14.8 100.0 '(03 100.0 GOVERNMENT FINANCE CentralGovernment ( TL Bln.) % of GDP 1971 1971 196b-71 Current Receipts 36.6 21.1 19.8 Current Expenditure 33.2 19.1 15.8 Current Surplus 3- -S.0 Capital Expenditures 14.2 8.2 8.6 External Assistance (net) 0.8 0.5 1/ The Per Capita GNP estimate is at 1970 market prices, calculated by the same conversion technique as the 1972 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. Growth trends, which may differ from compounded average growth rates 31 Fixed investment | 4 Including debt repayment and capital transfers Excludes 1.8 Billion TL net borrowing by State Enterprises, guaranteed by Government  ANNEX I Page 2 of 2 COUNTRY DATA - TURKEY I May MONEY, CREDIT and PRICES 1965 1969 1970 1971 1971 1972 (Million TL outstanding end period) Money and Quasi Money 22,000 41,000 50,400 64,400 Bank Credit to Public Sector 5,518 10,136 11,297 .. Bank Credit to Private Sector 15,388 30,846 40,923 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 39.7 34.0 36.5 37.2 General Price Index (1963 = 100) 109 137 146 169 165 197 Annual percentage changes in: General Price Index 5.8 6.6 15.7 19.3 Bank credit to Public Sector 16.4 11.4 Bank credit to Private Sector 19.0 13.3 BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1969-71) 1969 1970 1971 US $ Mln % (Millions US $) Cotton 160- F 2. Hazelnuts 93 15.5 Exports of Goods, NFS 675 760 853 Tobacco 82 13.6 Imports,of Goods, NFS -969 -1,132 -1,356 Textiles 27 4.5 Resource Gap (deficit = -) _29 -5 Raisins 22 3.7 -372 -503 Interest Payments (net) 5| -44 -48 _6o All other commodities 217 36.1 Workers' Remittances 141 273 471 Total 601 105L Other Factor Payments (net) -32 -33 -36 Net Transfers 8 8 6 EXTERNAL DEBT. DECEMBER 31. 1971 Balance on Current Account -221 -171 T2 US $ Mln, Direct Foreign Investment 24 58 45 Net MLT Borrowing 164 140 218 Public Debt, incl. guaranteed 2,190 Disbursements 279 337 343 Non-Guaranteed Private Debt 49 Amortization 5j -115 -197 -125 Total outstanding & Disbursed 2T-W Subtotal 188 198 263 Capital Grants 41 83 55 DEBT SERVICE RATIO for 19711/ Other Capital (net) 20 34 27, as % of goods and nf services 20.1% Other items n.e.i 94 42 123 as % of goods,and services 12.9% Increase in Reserves (+) 122 T186 346 Gross Reserves (end year) | 245 431 772 Net foreign assets (end year)7/ -20 11 411 RATE OF EXCHANGE IBRD/IDA LENDING, FebruLry 28, 1973 Through August 1970 IBRD IDA US $ 1.00 = 9.00 TL TL 1.00 = US $ 0.11 Outstanding & Disbursed 94 Undisbursed 263.2 .1 August 1970 - Dec. 1971 Outstanding incl'. Undisbursed 35'.6 US $ 1.00 = 15.00 TL TL 1.00 = US $ 0:067 Since December 1971 US $ 1.00 = 14.00 TL TL 1.00 = US $ .0714 sJ Including debt relief 6 Including SDR'ts 'End of year April 6, 1973 qCountry Program Department II Europe, Middle East and North Africa Region  ANNEX II Page 1 of 5 THE STATUS OF BANK GROUP OPERATIONS IN TURKEY A. STATEMENT OF BANK LOANS AND IDA CREDITS (As of February 28, 1973) Loan or US$ Million Credit Amount (less cancellations) Number Year Borrower Purpose Bank IDA Undisbursed Seven loans and seven credits fully disbursed. 70.7 80.3 -- 568-TU 1968 Republic of Turkey Keban Transmission Lines 25.0 3.8 587-TU 1969 Republic of Turkey Seyhan Irrigation Stage II 12.0 11.1 143-TU 1969 Republic of Turkey Seyhan Irrigation Stage II 12.0 .4 589-TU 1969 TSKB Industry 25.0 .1 623-TU 1969 Republic of Turkey Third Cukurova Pbwer 11.5 1.8 713-TU 1970 TSKB Industry 40.0 20.6 236-TU 1971 Republic of Turkey Livestock I 4.5 4.5 748-TU 1971 Republic of Turkey Education 13.5 13.4 762-TU 1971 Republic of Turkey Fruit and Vege- table 10.0 10.0 257-TU 1971 Republic of Turkey Fruit and Vege- table 15.0 14.9 763-TU 1971 TEK Pbwer Transmis- sion 24.0 19.6 775-TU 1971 Republic of Turkey Fourth Cukurova 7.0 6.o 281-TU 1972 Republic of Turkey Irrigation Rehabilitation 18.0 18.0 817-TU 1972 Republic of Turkey Steel Mill Expansion 76.0 75.8 844-TU 1972 Republic of Turkey Istanbul Water Supply 37.0 37.0 324-TU 1972 Republic of Turkey Istanbul Urban Development 2.3 2.3 845-TU 1972 IGSAS Fertilizer Industry 24.0 24.0 330-TU 1972 Republic of Turkey Livestock II 16.0 16.o 873-TU 1972 TSKB Industry 40.0 40o0 Total 415.7 148.1 319.3 of which has been repaid _55.3 -- Total now outstanding 360. 148.1 Amount sold 3.6 of which has been repaid .8 2.8 Total now held by Bank and IDA 357.6 148.1 Total undisbursed 263.2 319.3  ANNEX, II Page 2 of 5 THE STATUS OF BANK GROUP OPERATIONS IN TURKEY B. STATEMENT OF IFC INVESTMENTS (As of March 31, 1973) Amount in US$ Million Year Obligor Type of Business Loan' Equity Total 1963 TSKB DFC -- 0.92 0.92 1966 SIFAS I Nylon Yarn 0.90 O.A7 1.47 1967 TSKB DFC __ 0.34 Oe34 1969 TSKB DFC -- 0.41 0.41 1969 SIFAS II Nylon Yarn 1.50 0,43 1.93 1969 Viking I Pulp and Paper 2.50 0.62 3.12 1970 ACS Glass 10.00 1.58 11.58 1970 NASAS Aluminum 7.00 1.37 8.37 1970 SIFAS III Nylon Yarn .75 -- 0.75' 1971 Viking II Pulp and Paper -- 0.05 0.05 1971 SIFAS IV Nylon Yarn -- 0.52 0.52 1972 TSKB DFC - -- 4 0.43 Total commitments 22.65 7.14 29.79 Less cancellations, sales, terminations and repayments 4.53 1.23 5.76 Total commitments now held by IFC 18.12 5.91 24.03 Undisbursed 0.29 1.24 1.53 C. PROJECTS IN EXECUTION i Ln No. 568 Keban Transmission Lines Project: US$ 25 million,.oan of, October' 31, 1968, Closing Date: December 31, 1973. Progress on this project was, interrupted for about a year in 1970/71 by a dispute between the Turkish,Electricity Authority (TEK) and the principal contractor concerning payment of the increased cost of the, project, following the devaluation of the Turkish lira. This matter has been,put to arbitration and TEK is now carrying out construction using its, own,staff. Subsequently, delays on delivery dates for project equipnent led to the. extension of the original closing for the loan to December 31, 1973., Since the earliest date for power operation (two units) of the Keban dam is likely to be postponed to 197h-75, the timing for the completion of the project is acceptable. Ln and Cr. Nos, 587Ah3 Second Seyhan Irrigation Project: US$ 12 million loan and JS$ 12 million credit of February 28, 1969. Closing-Date: 'June 30, 1975 The project is macing satisfactory progress and should be completed'on'time. Yields of wheat and seed cotton, the principal crops, reached record levels in 1971/72. A large part of this success can be attributed to the efficient working of the project extension service which was set up for the first time in. Turkey to inte- grate the various extension service activities in, the project area under a full lJ These notes are designed to inform the Executive Directors regarding the progress of projects in execution and, in particular, to report any problems which are being encountered, and the action being taken to remedg~ them. They should be read in this sense, and with the understanding that they, do not purport to present a balanced evaluation of strengths and weaknesses in project execution.  Annex II Page 3 of 5 time extension service manager with sole responsibility for the project. Coordination of irrigation and drainage works, on-farm development and the extension service has been achieved by a project coordinating committee representing the concerned Government Agencies. In Nos. 589, 713 and 873 TSKB (Industrial Develo4ent Bank of Turkey): US$ 25 million loan of March 12, 1969 US$ 40 million loan of November 27, 1970 and US$ 40 million loan of December 26, 1972. Closing Dates: Marc 31, 1973 December 31, 1974 and December 31 1976 respectively. Since the first Bank loan was made in 1950, a very satisfactory relationship has been developed with TSKB. These loans when fully disbursed would bring total Bank Group lending to TSKB to $168 million. The standard of TSKB appraisal work is consistently high and sub-projects submitted for Bank approval are well prepared. Loan 873 was made effective on March 21, 1973. Ln No. 623 Third Cukurova Power Project: US$ 11.5 million loan of June 27 1969. Closing Date: September 15, 1973. Work on this project is ahead of schedule, although costs have increased, chiefly due to currency realignments. Initial operation is scheduled for July 1973, three months ahead of contract date for completion. Cr. No. 236 First Livestock Project: US$ 4.5 million credit of February 22, 1971. Closing Date: June 30, 1975. Implementation of this project was delayed initially by difficulties encountered by the Turkish authorities in fulfilling some of the effectiveness conditions under the Credit Agreement and by admin- istrative problems in hiring the necessary staff for the project unit. These delays were largely due to the absence, following a reorganization of the Turkish Government administration in March 1971, of an effective coordinating link between the various ministries concerned with the project and between the Government and the Bank Group. Steps have been taken to correct this deficiency and progress on the project is now satisfactory. Ln. No. 748 Education Project: US$ 13.5 million loan of June 9. 1971. Closing Date: September 30, 1976. The execution of the project has progressed slowly, due to the weakness of the Project Unit and lack of communication between the Project Unit and the Government. As a result, the project is over a year behind schedule for civil works and five months for equipment procurement. A recent supervision mission provided assistance in preparing architectural briefs and has submitted several suggestions to strengthen the Project Unit, streamline its operations and ensure that specialists' assistance is available as and when required to expedite its work. Until now no disbursement applications have been made. A cost overrun .of about 30% is expected for civil works for the Management Institute and the six Adult Training Centers included in the project. Ln and Cr. Nos. 762/257 Fruit and Vegetable Export Project: US$ 10 million loan and US$ 15 million credit of June 22, 1971. Closing Date: June 30, 1976. This project was also delayed by difficulties in meeting some of the effecti- veness conditions by the due date for the reasons noted under Cr. 236 above. Although it is expected that the project should catch up on the time lost, the Agricultural Credit Survey, which is included for financing under the project, will be delayed beyond the forecast date. The SLrvey team has now been assembled, however, and is expected to produce a preliminary report in April 1973 and a full report in December 1973, which could permit Bank consideration of a first Credit project for FY 1975.  ANNEX II Page 4 of 5 Ln No. 763 TEK Power Transnission Project: US$ 24 million loan of June 22, 1971. Closing Date: March-31, 1 ag Implementation of this pro ject has been delayed by shortage of staff, First contracts were awarded early in 1972 and work is now progreasing according to the revised schedule. Problems in meeting the financial covenanta are under discussion. Ln No. 775 Fourth Cukurova Power Project: US$ 7 million loan of June 30, 1971. Closing Date: March 31, 1975. In part an extension of Ln 623, this project is still in the initial stage. Major contracts have been awarded and work is proceeding on achedule. Estimated combined foreign exchange cost of the Third and Fourth Cukurova projects has increased by about $1 million principally due to currency exchange variations. Cukurova is producing new cost estimates for Bank review. Cr. No. 281 Irrigation Rehabilitation Project: US$ 18 million credit of January 25, 1972. Closing rDate: June 30, 1977. Preparation of specification and bidding documents and the respective work programs of the Government agencies responsible for project implementation are in hand to enable work to commence on schedule in 1973. Appointment of consultants for on-farm development is taking longer than anticipated but should not hinder progress. Ln -No. 817 Steel Mill Expansion PoJect: US$ 76 million loan of Agril 28, 1972. Closing Date: December 31, 1976. Difficulties in coordinating the implementation steps for the project between the Company, the lenders (IBRD, USAID and U.S. Ex-Im Bank) and the project engineers have caused delay in the prequalification of contractora and preparation of specification and bidding documents. Ln No. 844 Istanbul Water Supply project: US$ 37 million loan of June 30, 1972. CloBing Date:., June 30, L977. This loan was made effective on January 5, 1973 after some delays. Considerable progress has been made in the selection of the consultants and some of the works are in progress. Cr. No. 324 Istanbul Urban Development project: US$ 2.3 million credit of June 30, 1972. Closing Date: June 30, 1977. This credit was made effective on January 5, 1973 following some delays due to the required actions for effect- iveness under Ln 844, Istanbul Water Supply, to which effectiveness of this project was linked. There has been considerable progress towards the selection of consultants although implementation will be delayed slightly due to the complexity of the necessary arrangements. Ln No. 845 IGSAS (Istanbul Fertilizer Company) Project: US$ 24 million loan of June 30. 1972. Closing Date: June 30, 1976. This project was declared effective on October 6, 1972. Progress is on schedule, although the Borrower is studying changes in some of the major features of the project. Cr. No. 330 Second Livestock Project: US$ 16 million credit of September 28 1972. Closing Date: December 31, 1976. The signing of the Credit Agreement was delay4d until September 1972 pending the Third IDA replenishment. Conditions of effectiveness were met by the due date of January 5, 1973.  Annex II Page 5 of 5 Technical Assistance Project - Turkish Electricity Authority (TEK): US$ 1.9 million grant of August 20. 1907. Technical Assistance contracts were terminated in November-December, 1972. Achievement, though short of target in some respects, is generally satisfactory and TEK now has a much improved accounting, budgeting and financial reporting system. The consul- tants' report concerning organization structure is under examination by the Bank.   Annex III Page 1 of 3 TUIRKEY RAILWAY PROJECT I. LOAN AND PROJECT SUMMARY Borrower: Turkish State Railways Guarantor: Republic of Turkey Amount: $47.0 million in various currencies, of which $37.0 million would be for foreign exchange costs and $10.0 million would be for local costs. Terms: Twenty-five years including 5 yeara grace, 7 l/4 percent per annum. Project Description: The proposed project consists of the investments and reforms included in the first three years of a six-year plan (1972-77) for the physical, administrative, and financial rehabilitation of the railways designed to enable the rail- ways to provide expanded, efficient, long-haul transportation especially for the bulk traffic of agriculture, mining and industry. The main components are track renewal, installation of signalling and teleconmmunications systems, manufacture of diesel engines and rolling stock, modernization and diesel- ization of workshops, modernization of support facilities, training, and consultants' services. Estimated Cost: The cost of the project is estimated at about $223 million equivalent and is summarized as follows:  Annex III Page 2 6f 3 US$ Million Local Foreign Total Track Renewal 39.8 18.5 58.3 Signalling and Telecommunications 9.5 2.6 12.1 Dieselization and Renewal of Rolling Stock 57.1 26.1 83.2 Modernization of Maintenance and Repair Facilities for Motive Power and Rolling Stock 8.8 8.1 16.9 Training 0.4 0.2 o.6 Consultants' Services 0.1 0.3 0.4 Miscellaneous 8.7 1.6 10.3 Contingencies 24.3 9.5 33.8 Total2! Tl 51 ; Financing Plan: US$ Milliorn Government 158.5 Proposed Bank Loan 47.0 European Investment Bank 16.1 French Bilateral Credit 1.2 222.8 Note: The financing from the European Investment Bank would be for imported machinery and components for manufacture of diesel loco- motives by the Turkish State Railways. The French bilateral credit 1/ Excludes $7.2 million in customs duties and taxes for 1972; there- after project exempt.  Annex III Page 3 of 3 would finance complementary foreign exchange requirements for the manufacture of those locomotives. The proposed Bank loan would finance the remaining foreign exchange costs (apart from a few items already contracted for) and certain local cost items. Procurement Arrangements: All imported items wfould be under international competitive bidding according to normal Bank policy. Local costs would be largely force account and possibly some contracting with local firms. Consultants: The project provides for (a) studies for the Borrower financed by the United Nations Development Program on management and organization; abandonment or rational- ization of uneconomic lines, stations, and services; the feasibility of construction of two connecting lines; and optimum signalling investments; (b) con- sultants to the Borrower to be financed by the proposed loan to assist in implementation of commercial policy reforms; and monitoring the track renewal, signalling, and dieselization programs; and (c) consultants to the Guarantor financed by the United Nations Development Program for assistance to the Transport Coordination Agency in organizing its work and developing a transport mnnagement information system. Estimated Disbursements: US$ Millions FY 1974 FY 1975 Foreign Exchange 20.0 17.0 Local Currency 7.4 2.6 Total 27.4 19.6 Economic Rate of Return: 16-26 percent Appraisal: Report Number 12a-TU, dated April 6, 1973, Transport- ation Division-Projects Department, Europe, Middle East and North Africa Regional Office.   IBRD 10077 / T U R K E Y J U L Y 1 9 7 2 \ ~~~~~~~~~~TURKEY U S S R. TURKISH STATE RAILWAYS (TCDD) TCDD TRAFFIC FLOWS IN GROSS TON-KM PER ROUTE KM 1970, ---' I,. KnnZ .r? K,i_eIr TRACK CONDITIONS AND TRACK RENEWAL PROGRAMS 1972-82 8 / A C K 5 E 4A t ED[RE' ------ K-A & F - % ; -Wk ;ANZ D b .J .,//S./- 5-+ \ ~~~~ Erl i \ . X 1 sq '* /N(A 375 -\ 'Ge - D / /< ) ANKIR ' Tci 0cnon Sea- Sornn~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~22 ~~~~~~~~ ~ I VAN in 1971 j X~~~~~~~~~~~~tUAfYA.< -Tokrnw80ihnwmaeil 92-7 f//1f\ .ic X>i / ~~~~~~~~ *AVALVTYA~~~~~~~~~~~~~~~~~~VN ~k |' Takeelwhnwoeall7-8 v) J _ I IGrossTnKolodERIl I < Z Tee > Trock, rebewel wth second hond molerials !-< Gross Ton Km flaure given in e sKONYA AENir UR 2is .. ..ft d~ p r GZIANTEP R. SRA o IqO 200 \ Track in good condition 140 icd in o Progro ( d' Track infai condition Track renewal with new materials 1972-74 ' YI Track renewal with new materials 1975-777 SRDEJJ //Cbne N ~~~~~~~~~~~~~~~~Track renewal wioth second hand materiols 1975-7 EIIZ GrossnTon-K. of Passenger Trains ......Track renewal with new mcaterials 1978-82 J iiilGross Ton-Ken of Goods Trains Track renewal with second hand materials Gross Ton- Km figu,fs given in thlouscinds ARo 200 X~ - --Track in poor condirion not included in any Program n O~oor" 7 I I I n' aone,e c,ec~ v C Kile-iee - International boundary LLI rrV'iaOrjM