Turkey - Ceyhan Aslantas Multipurpose Project

CIRCULATING COPY TO BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P1176-TU REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT AND LOAN TO TURKEY FOR A MULTIPURPOSE IRRIGATION AND POWER PROJECT February 1, 1973 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization.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.  Currency Unit Turkish Lira (TL) US$ 1 TL 14000 TL 1 US$ 0.07 TL 1,000 = US$ 71.40 TL 1,000,000 = US$ 71,429 Turkish Fiscal Year - March 1 to last day of February  INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMIENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND DEVELOPMENT CREDIT TO TURKEY FOR A MULTIPURPOSE IRRIGATION AND POWER PROJECT 1. I submit the following report and recommendation on a proposed development credit for the equivalent of US$30 million and on a proposed loan for the equivalent of US$44 million to Turkey to help finance a multi- purpose irrigation and power project. The credit would be on standard IDA terms, and the loan would have a term of 30 years including 9 years of grace with interest at 7-1/4 percent per annum. 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 data 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 Parliament 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. The second Erim government had greater political party representation, but its attempt to push through modified reform measures again met with opposition in Parliament. A mining reform bill and a moderate land reform bill were introduced in Parliament, but little was done to further educational reform 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 by Prime Minister Melen was formed in May 1972. It declared its aim to pursue the reform measures and prepare for national elections in the fall of 1973.  4. While long-term economic policy issues lkave recently become a cause of political tensions, growth in Gross N\ational 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 increased substantially, with its share in GNP rising from 15 to 21 percent. Although total consumption increased considerably, gross niational savings increased at a mucli faster rate, their share in GNT rising from 11 to 20 percent. Hlowever, in the last two years (1970 and 1971), in spite of a big jump in workers' remittances, the share of gross national savings has not risen substantailly due to relatively poor public savings, and the share of invest- ment also increased more slowly. 5. 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 plans (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 production had a trend growth rate of about 3 percent per annum, 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. In 1971 CNP increased by 9 per- cent in real terms, thanks largely to an excellent harvest, a continued indus- trial growth and a sharp rise in em4grant worker remittances, and output in 1972 may also have been above average. 6. The balance of payments situation was c:haracterized in 1967-70 by increasing trade deficits, ancl a strict system of import controls leading to delays and shortages of essential imports and, zonsequently, to underutiliza- tion of production capacity. hle overvalued official exchange rate was changed in August 1970 (from TL 9 to TL 15 per US$) and revised to TL 14 in December 1971. 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 improvements have led to better availability of essential imports of investment goods, raw materials and parts, and to rebuilding of stocks. Thie improvement in the balance of payments has continued in 1972; in the first eleven montlhs, exports were 39 percent higher than in the corresponding period in 1971 due primarily to increased exports of tobacco, cotton, fruits and vegetables, textiles, food and beverages, hides and leather produlcts and petroleum products; imports were about 28 percent higher; and workers' remit- tances had already reached $610 million by the end of October, compared with $470 million during the whole of 1971. The overall result has been a sub- stantial rise in gross foreign exchange reserves, which stood at $1,341 million at the end of November 1972. Net foreign assets, which were negative in 1966- 68, rose to over $500 million, the equivalent of about five months' imports. The growth of foreign exchange reserves is unlikely to continue at the same rate however particularly as short term debts are repaid and if intport liberali- zation proceeds further.  -3 - 7. The budgetary situation has been dominated in the last decade by the need to control the rapid growth of public expenditures. Tax revenues have grown faster than GNP, their share rising from 12.9 percent in 1962 to 17.6 percent of GNP in 1971, but the increases in tax revenues have been more than offset by the rise in current expenditures and transfers. The overall 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 recourse to the Central Bank for short-term advances and to other short-term borrowingX The difficulties facing public mobilization of resources led to public invest- ment expenditures falling short of targets, and to an actual decline in putlic fixed investment in real terms in 1971. The pressure on public resources tas continued in 1972, and the growth of public development expenditure has probably suffered as a result. 8. The financial results of the State Economic Enterprises (SEE's) have been consistently poor. Although the SEE's now account for over 10 percent of the value added and about 20 percent of the fixed investment in the economy, the rate of return on investment in the 28 major producing SEE's as a whole has been less than 3 percent in the last few years. The low profits of the SEE's have necessitated increasing budgetary transfers, which amounted to TL 3.5 billion in 1971. The profitability varies among different SEE's, with railways and the Coal Corporation incurring heavy losses. 9. 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 continiued rise in receipts from remittances and exports, as well as by the resumed growth of investment, both private and public. Wholasale prices rose by 13 percent in the first eleven months of 1972. In these circumstances, better mobiliza- tion 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. 10. 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 has  - 4 - 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 comparative advantage and is facing difficulties in expanding it's traditional exports. Some progress has already been iade in shifting land from sugarbeet to sun- flower, feedgrains and other crops. 11. The employment 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 to about half the increase oGny. 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 continued emigration, urban unemploy- ment is likely to grow. 12. 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. The draft Third Plan targets imply excessively high marginal savings rates. If sub- stantial 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 borrowing. Proposals for a capital market bill are now being considered. 13. If the country remains 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. Turkey will continue to need substantial amounts of external assistance to be able to maintain the high level of investment which is needed to achieve this rate of growth, as well as meet its financial obligations.  5- 14. Total debt outstanding and disbuirsed 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 arrangements for debt relief together with substantially increased workers' remittances, the debt service ratio fell considerably 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 oc- curred relatively recently and are based to a considerable extent on external factors, Turkey should continue to seek a part of its external aid on conces- sionary terms and continue for the time being its restraint in using suppliers' credits. PART II - BANK GROUP OPERATIONS IN TURKEY 15. 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. 16. 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; (b) the external orientation and liberalization of the economy to improve external 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.  - 6 - 17. 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 urbarn develop- ment and industrial finance, and in the Cukurova region around Adana on the southern coast, where the proposed multipurpose project would be located, with emphasis on power, irrigation and fruit and vegetables. A start has recently also been made on a complementary effort to provide 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 fatten- ing in Eastern and Central Turkey and by preparing, with the assistance of the IBRD/FAO cooperative program, an integrated rural development project in rainfed areas of Central Turkey. 18. Several specific 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) which has made a start in this direction, and in the loan 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, forestrv and irrigation, are expected to enhance Turkey's ability to earn foreign exchange as well as spread develop- ment in rural areas. On the other hand, attempts to assist the expansion of tourism have not borne fruit, indicating some Government hesitation as to the importance to be given to tourism in Turkey's development strategy; as a re- sult tourism projects suitable for Bank consideration have not yet been put in shape, although an IPC investment in the sector is likely to be presented soon to the Executive Directors. The objective of institution building has been pursued chiefly in agriculture (including agricultural credit), power and in transportation where a loan for railways, currently under negotiation, is expected to pave the way for substantial organizational and financial improve- ments. In preparation of this, the Bank has already acted as executing agency for UNDP technical assistance studies on transport coordination and on a rail- way investment program. The Bank has furthermore been instrumental in bringing 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. 19. Previous Bank/IDA lending in the agricultural sector totals $130.3 million equivalent and includes six credits and three loans. Repeater operations at two or three year intervals in five sub-sectors form the heart of the future lending program: in fruit and vegetables, aimed at exports; in irrigation rehabilitation; in livestock and dairy, which support developmenlt  - 7 - in Eastern Turkey; in agricultural credit; and in integrated rural develop- ment which focuses on the problem of increasing output in the purely rainfed areas of the country. Finally, it is expected that the Bank Group will con- tinue to finance selectively large-scale irrigation projects in Turkey. 20. Past credits and loans for power development amounts to $93.7 million of which $44.7 million is for power facilities in the Adana Region where the proposed project is located, and $49 million to assist the Turkish Electricity Authority (T.E.K.) in financing other power projects in Turkey. Several new projects are under active consideration by the Bank Group to continue providing TEK with adequate power facilities in future years. 21. 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. In addition to the proposed Credit and Loan, two other Bank/IDA operations are planned for FY 1973; a $47 million loan to help finance a project for the financial rehabilitation and the technical and administrative modernisation of the railways, and a loan of about $12 million for power development in support of Istanbul urban development. 22. IFC has been active in Turkey, -having participated in industrial investments in nylon yarn, pulp and paper, glass and aluminum. Total commit- ments so far amount to about $30 million. IFC is currently investigating new investment opportunities in various sectors including special steel and tourism. PART III - AGRICULTURE IN TLRKEY 23. A detailed description of Turkey's agriculture sector is contained in the report entitled "Current Economic Developments and Prospects of Turkey" (EMA 53a) dated September 18, 1972. 24. Agriculture is the dominant sector in the Turkish economy, provid- ing some 60 percent of total employment and the bulk of foreign exchange earnings. The growth trend in agricultural production (excluding forestry and fisheries) averaged 3.1 percent during the last decade (1962-71). Favor- able weather conditions, combined with the cumulative expansion of the area under irrigation in recent years raised the average growth rate during the first four years of the Second Development Plan (1968-72) to the target rate of 4.2 percent, despite the fact that investment in agriculture actually declined by 2.7 percent annually in these years. The Third Five-Year Plan (1973-77), like the second, assigns lower pricrity to investment in agri- culture relative to industry and transport. It is clear that in order to absorb rising population in the rural areas and, more importantly, to check the present drift of the rural underemployed to urban centers, which is creating problems of its own, a concentrated effort is required not only to increase the volume of investment in agriculture but also to bring about necessary institutional and other reforms and a reallocation of resources within the sector.  -8- 25. Within the agriculture sector, resources are unevenly distributed both from the geographical point of view and in social terms. The most rapid development in agriculture to date may be seen in the climatically better favoured coastal regions of southern and western Turkey which have responded more readily to the introduction of a new technology, including new seed varieties, credit and increased use of irrigation. Opportunities undoubtedly exist in the less favoured areas, particularly in Eastern Turkey and parts of the Anatolian plateau, for increasing wheat yields and livestock production, for which there is an unsatisfied demand in Turkey. Greater emphasis is now being given to public investment and supporting services for dry-land agriculture in the interior of the country, but the greatest potential for increased production hinges on1 the expansion of irrigation in view of the limitations imposed by uncertain rainfall and the lack of new cultivable areas on which to expand. 26. Present land ownership and tenure arrangements are one of the barriers to innovation and to raising agricultural productivity. Although there is wide discrepancy between different parts of the country and much of the land is still unregistered, available statistics indicate that a significant proportion of cultivable land is in large ownership units, es- pecially in parts of Eastern Turkey where absentee ownership and sharecropping are common and where land reform would thus be beneficial. In contrast, however, the larger units that exist in the Cukurova Region (see para 49) are often operated on modern lines by innovative landlords where the division of ownership may depress output in the short run although much would depend on the smoothness of the transfer, the size of the new units and the availability of credit, marketing and other supporting services. The Government has been aware for many years of the unsatisfactory land tenure situation. Land reform has been adopted as one of the main objectives of the present Gov- ernment ancd is the subject of a Land Reform Bill submitted to Parliament in April 1972. In July 1972 a "Preliminary 'leasures Law" was passed pro- viding for the creation of a secretariat of land reform, declaration by land owners in provinces to be designated by the Council of Ministers of their land holdings, and other preparatory measures. The Land Reform Bill is still under discussion in Parliament and has been the subject of numerous proposals for amendment; its speedy passage, leading to a imore equitable distribution of wealth and incomes in rural areas, would stimulate private investment on the part of farmers, who cannot at present afford land improve- ments on more productive livestock and equipment, and thus accelerate growth of output. Efforts at consolidation of fragmented land holdings, which is also a problem in many areas, has been offset in the past by the inheritance system. The Land Reform Bill is expected to remedy this situation and, when passed, would enable land consolidation to proceed more rapidly in the future in those areas where cadastral surveys have been completed. 27. Other constraints on agricultural production in Turkey are largely institutional. Turkey has comprehensive price support and control programs that influence prices for most farm products including major agricultural exports. Some of these are socially oriented and have led to the accumulation of excessive stocks of certain products such as tobacco and tea. Such controls should be readjusted wherever possible in order to stimulate the  - 9 - production of alternative crops. Exploitation of forests should be increas- ed and made more effective through improved policies and management. Finally, in view of insufficient supply of inputs in recent years, vigorous efforts should be made to ensure adequate marketing and distribution facilities and supplies of credit, seeds and fertilizer on time and where needed. 28. Turkey has paid close attention in recent years to increasing the volume of agricultural exports, a policy which has been supported by the Bank Group through such projects as the Seyhan Irrigation Project and the Fruit and Vegetable Export Project and to which the project under considera-- tion would make a substantial contribution. The total volume of agricultuzal exports reached $491 million in 1971, compared with $443 million in 1970 and $406 million in 1969 and 1968, representing about 15 percent of total agricultural production, and zontinued to rise rapidly in 1972. Most of the increase in 1971 was accounted for by higher prices for cotton but exports of citrus and livestock also show marked increases. Measures to reduce tariffs and quotas on Turkish exports to the EEC and the recent expansion of ECC membership would further help to increase exports. 29. Land use in Turkey (excluding forest areas, amounting to some 18.0 million ha, and waste land) is almost evenly divided between agricultural land (27.0 million ha) and pasture land (26.0 million ha). About 13.5 mil- lion ha of agricultural land is suitable for irrigation, of which it is estimated that 8.1 million ha may be irrigated without using advanced levels of technology, yet only 2.0 million ha are actually irrigated. The remaining 13.5 million ha of agricultural land is under dry land farming. Growth trends in output during the past decade are highest for those crops that have been brought under irrigation, where there has been an increase in fertilizer use or a shift to higher value crops such as cotton, citrus and vegetables. Yields per ha have not changed significantly in the last decade for cereals and pulses (which cover 80 percent of the planted area) and seem to have dropped in recent years for tobacco. Yields bave increased over 50 percent for cotton and sugar beet however. 30. Expansion of irrigation offers a major means of increasing agricultural employment and production in Turkey. An anbitious prograr of construction of major dams and irrigation schemes has been carried out for many years. This has been undertaken efficiently but realization of the full benefits from these schemes has-been prevented in the past by the relatively slow pace of on-farm development and insufficient supporting services such as road construc- tion and extension work. Coordination of these activities is a recurrent problem in Turkey where a number of Ministries and Government Agencies are involved in implementation. Bank Group investments in the irrigation sub-sector have attempted to correct these shortcomings by bringing an integrated effort to bear on the part of all Agencies concerned with development, and by providing funds for rehabilitation of existing irrigation schemes as well as for imple- mentation of new schemes.  - 10 - PART IV - THE PROJECT 31. A dezailed description of the proposed project is given in the report entitled "Ceyhan Aslantas 'Multipurpose Project" (No. 16a-TU) dated January 31, 1973 1973 which is being distributed separately. A Loan, Development Credit and Project Summary is attached as Annex III. 32. Project preparation was carried out by the Government with the assistance of consultants and has been closely followed by the Bank Group since its inception some ten years ago. The project was appraised in April/ May 1972. Negotiations were held in 1Washington in November and December 1972. The Turkish delegation was headed by Mr. Akinci, Chief Financial and Economic Counsellor, Turkish Embassy, Washington, D.C. and included representatives of the Government Agencies which would be responsible for project implementa- tion. 33. The project is located on the Ceyhan Plain in the Cukurova Region of Southern Turkey immediately east of the Seylian Irrigation Project financed by the Bank Group under loans and credits miade available in 1952 (Ln.63), 1963 (Cr.38) and 1969 (Ln. and Cr.537/143) (see map). Details on recent experience on this project is given in Annex II. The main town in the project area, Ceyhan,. is about 350 km. south-east of Ankara and 40 km east of the provincial capital of Adana. The main features of the project consist of the construction of the Aslantas dam and power plant (capable of generating annually 500 GWh of electric energy), irrigation and drainage works for 97,000 ha, and flood protection for 35,000 ha of irrigable land. The project has been designed so tllat irrigation can be expanded by a further 32,000 ha, subject to the completion of satisfactory feasibility studies in the proposed extension areas. 34. Additional features of the project include road improvements, pro- vision of farmers credits, dairy cattle for farm demonstrations, buildings, consultant services and training needs of the project. The project also provides for the purchase of hydromechanical and electrical equipment for the power plant and operation and maintenance equipment for irrigation, drainage, and extension service. 35. Project Administration. The coordinated action of four Government Agencies is required to construct the project: (a) DSI - State Hydraulic Works (an agency of the Ministry of Energy and Natural Resources) would be responsible for con- struction of the dam and power plant, flood protection works and all irrigation and drainage works down to the farm unit.  - 11 - (b) Topraksu - Soil Conservation Agency (an agency of the Ministry of Village Affairs) would be responsible for carrying out all on farm development works chiefly on the farm unit including land levelling, installation of tile and surface drainage, improvement of soil structure and construction of feeder roads in the project area. (c) Extension Service (under the Ministry of Agriculture) would be responsible for advisory work among farmers. A separate ex- tension service unit would be established whose staff would be employed solely on project work, on the pattern of the Seyhan Irrigation Project extension service which is working success- fully. (See Annex II). (d) ABT - Agricultural Bank of Turkey (an autonomous agency under the Ministry of Commerce) would be responsible for providing agricultural credit. 36. In order to achieve coordination of these various activities during project construction, the Turkish Government will be required to establish, within six months of effectiveness of the Credit and Loan Agreements, a project coordinating committee, on which the relevant Agencies would be represented, and will appoint a chairman from among the members of the Committee. Coordina- tion will also be facilitated during the critical period of project implemen- tation by the work of the consultants to be appointed under the project (see para 37). DSI would be responsible for the operation and maintenance of all project works with the exception of the pewer plant. The Turkish Electricity Authority would be responsible for the construction of power transmission lines (not included in the project) and operation of the power plant. The Aslantas dam would be operated as part of T.E..L's inter-connected system. 37. Consultants. Both Topraksu and the Extension Service will require outside assistance in organizing their work on the project. The Government has therefore agreed to the appointment of a consultant for a period of three years to assist Topraksu in construction and improvement of heavy equipment utilization, and of two consultants for the Extension Service for a total of eleven man years to help consolidate extension services in the field. 38. DSI has had considerable experience in contracting, operating and maintaining irrigation and drainage projects and is considered capable of processing the respective works on the project without outside assistance. The construction of the dam and power plant, on the other hand, presents several unique problems arising from the complex dam site geology with attendant seismic and flood hazards which, coupled with the tight construction schedule, make it necessary to engage consultant services. The Government will engage an independent group of four specialists, acceptable to the Bank and the Association, to advise as needed on special problems which might develop during the design and construction period and will also appoint a consulting firm, acceptable to the Bank and the Association, to assist DSI with the supervision of construction for the dam and power plant. This appointment would be a condition of effectiveness of the Credit and Loan Agreements.  - 12 - 39. Procurement. Equipment, materials and vehicles for the project and to be financed out of the proceeds of the Credit and Loan would be procured on the basis of international competitive bidding. Local manufacturers would be allowed a preference of 15 percent in bid comparison or the import duties, whichever is the lower. Certain items of equipment, materials and vehicles ($14 million), which can be manufactured locally, have been reserved for local procurement under normal government bidding procedures and will be financed entirely by the Government. Cost and quality comparison between current local and foreign contracts for similar equipment indicate that this arrangement should not involve any cost or other penalty for the project. 40. Civil works, which total about $143 million equivalent excluding contingencies, would be tendered on the basis of international competition with the following exceptions: (i) Tne seasonal nature of land levelling rules out the possibility of attracting international bidding. It is therefore pro- posed that part ($15 million) of on-farm development would be carried out by Topraksu using force account and the remainder ($6 million) by local contractors assuming, in the latter case, that sufficient interest is generated. Should contractor interest not materialise, then this work would be carried out on force account; (ii) The first three contracts for irrigation and drainage works ($13 million) would be carried out by local contractors and would be financed entirely by the Government. This would permit irrigation of land from run of the river flows as quickly as possible, thereby realising early benefits from the project which would not otherwise be possible if inter- national bidding procedures were observed and (iii) The diverse nature of buildings, workshops and communication facilities ($3 million), which are in- dividually small, and the phasing of their construction does not permit group- ing of contracts; international bidding would thus be impractical. 41. Because of the complexity and magnitude of the dam and power plant civil works, bidders would be prequalified by DSI whose recommendations, together with the comments of the consultants, would be sent to the Bank for approval. Irrigation, flood protection and drainage works contracts would be so grouped that the value of any one group would be not less that $7 million to attract wider competition; bidders would be invited to bid for the group or any part of the group. 42. Project Costs and Disbursements. The total cost of the project (including physical and price contingencies)is estimated at $326.6 million net of duties and taxes, of which $104.2 million would be in foreign exchange. A detailed breakdown of costs is given in Annex III. The proposed Credit and Loan amount of $74 million is to cover the estimated foreign exchange compon- ent including physical contingencies of all civil works, save for the three contracts noted in paragraph 40 (ii) above. It would also cover the foreign exchange cost of consultants, training, purchase of dairy cattle for farm demonstrations and of all equipment subject to international competitive bidding. The Government will be responsible for covering the balance of the estimated foreign exchange cost ($30.2 million) which corresponds mainly to the contingency provision for price escalation, and the whole of the local costs ($222.4 million). In addition, the Government will finance interest  - 13 - and other charges on the Bank loan during construction (estimated at $10.3 million on the $44 million loan), annual recurrent costs (estimated at about $2.5 million), and make available adequate credit to farmers in the project area, where credit demand is expected to reach some $20 million per year at full development. 43. The Credit and Loan would be disbursed against the full foreign exchange cost of imported equipment, livestock, consultant services and over- seas training of project staff. Expenditure on civil works would be reimbursed at the rate of 35% of the cost of the Aslantas dam and power plant, 31% of the cost of irrigation, drainage and flood protection works and 15% of on farm de- velopment and building construction costs. 44. T4ater Charges. The Turkish authorities have agreed on a formula for the recovery over the life of the project of full operation, maintenance and investment costs together with reasonable interest thereon, as provided under existing legislation, by means of levying annual water and land development charges on farmers in the project area. Such charges would be brought into effect immediately following the introduction of irrigation into any portion of the project area. The level of water and land development charges would be reviewed at least every five years and would be increased if necessary in order to reflect price changes due to inflation. 45. The recommendations of a lWater Charges Study carried out in 1972 by the Seyhan Project consultants are at present under review by the Gov- ernment. Some of these recommendations, if put into effect, would change the basis for calculating existing water and land development cnarges (e.g. by charging farmers on an area rather than a crop basis, a change advocated by the Bank). The Government has agreed to continue discussion on the implemen- tation of the Study and an assurance was received during negotations that, should the Government wish to introduce legislation altering the present system for the collection of water and land development charges, it would ensure that provision is made for the recovery of the full costs of the project. 46. Environment and Health. The health of the population would not be adversely affected as a result of the project. There is no Schistosomiasis in the Province of Adana and any initial increase in the incidence of malaria can be brought under control by the existing health services. The Bank is satisfied that archeological sites of major interest in the project area will not be flooded. 47. Economic Benefits. At full production, about 5 years after comple- tion of the project, the annual net value of production, valued at interna- tional prices, is estimated at TL 761 million (US$54.4 million) compared to TL 247.3 million (US$17.7 million) at present and a projected value without the project of TL 269.0 million (US$19.2 million) not accounting for flood and area losses. In addition, power benefits would amount to some TL 85.9 million (US$6.0 million). The incremental net value of production due to  - 14 - the project would thus be TL 577.8 million (US$41.1 million). Mlost of the incremental cotton and part of the fruit and vegetable production from the project is expected to be exported bringing an annual increase of $20 million in foreign exchange earnings at full production. 48. The average life of the project facilities has been assessed at 50 years. Over this period the economic rate of return is estimated at 13 Y%. 49. Some 16,000 farm families would benefit directly from the project. Increased labor requirements would be met by doubling family labor employment and a five-fold increase in hired labor. In addition, the project would generate employment in the supply of inputs, processing and marketing and in transpor- tation. 50. There are about 10,000 farm units in the project area, of which 8,300 are below 15 ha. and 400 only exceed 50 ha. in size. Taking a typical small farm of 5 ha, the incremental income per annum as a result of the project, net of taxes, would amount to T, 17,800 or TL 3,560 per ha compared with TL 60,400 or TL 2,020 per ha for a 20 ha farm. The incremental income on larger farms is estimated to be less than that for smaller farms due to the progressive nature of income taxes in Turkey. Income distribution is uneven in the project area due to the variation in the size of land holdings. How- ever, if pending legislation (see para. 26) on agrarian reform is eventually introduced, an improvement in income distribution can be expected. PART V - LEGAL INSTRU.MENTS AND AUTHORITY 51. The draft Development Credit Agreement between the Association and the Republic of Turkey, the draft Loan Agreement between the Bank and the Republic of Turkey, the Reports of the Committees provided for in Article V, Section 1(d) and Article III, Section 4(iii) of the Articles of Agreement and the text of a Resolution approving the proposed credit and loan are being dis- tributed to the Executive Directors separately. 52. The Executive Directors? attention is drawn to the covenants in the draft Development Credit Agreement relating to the employment of consultants (Sections 3.02, 3,03 and 8.01(b)), project coordination (Section 3.07) and water charges (Section 4.08). 53. I am satisfied that the proposed credit and loan would comply with the Articles of Agreement of the Association and the Bank.  - 15 - PART VI - RECOMMENDATION 54. I recommend that the Executive Directors approve the proposed credit and loan. Robert S. McNamara President Attachments  ANNEX I Page 1 o f 2 COUNTRY DATA - TURKEY AREA POPULATION DENSITY 780,000 km2 37.2 million (mid-197_) 4 per km Rate of Growth: * - (from l9CSto 1972) 140 per km2 of arable lai POPULATION CHARACTERISTICS (1967) HEALTH (196,') Crude Birth Rate (per 1,000) Population per physician 2,760 Crude Death Rate (per 1,000) 14._ Population per hospital bed 580 Infant Mortality (per 1,000 live births) 157.0 INCOME DISTRIBUTION (1965-5Et, Istanbul) DISTRIBUTION OF LAND OWNERSHIP (19's5) % of national income, lowest quintile 7 % owned by top 5% of owners highest quintile 4-' % owned by smallest 10% of owners 2 ACCESS TO PIPED WATER (i of oopulation) ACCESS TO ELECTRICITY (1970)(5 of populati 7, of population - urban -- % of population - urban 7 - rural -- - rural NUTRITION (19644<) EDUCATION Calorie intake as % of requirements 110 Adult literacy rate % 4 (19i.') Per capita protein intake (grammes) 77,9 Primary school enrollment 7, 77(1968) 1/ GNP PER CAPITA in 1971: US $ 327 GROSS NATIONAL PRODUCT IN 197 1 ANNUAL RATE OF GROWTH (7,, constant prices) US $ Mln. 7, 196?-65 1965-70 1971 GNP at Market Prices 11,939 100.0 5 0 7 1 8.9 Gross Domestic Investment ..544 21.3 10.5 2 10.'i' .4 Gross National Saving 2,422 20.3 14 3- 11.1 Current Account Balance 122 1.0 8.6 Exports of Goods, NFS 855 7.1 . 4.7 Imports of Goods, NFS i,,6 11.4 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1971 Value Added Labor Force V. A. Per Work US $ Mln. 7 Mln. %. US % Agriculture 3,06': 26.6 9.8 66. ' Industry 2,710 2. 4 1.5 10' ' 1 Services 5.)97 50.0 .8 2,.1 1. [ *11 Una I IloCo ,1d 'Iotal/Averagc 11,590 100.0 14.; 100.0 ThT 100 GOVPRNMENT FINANCE CentralG(overn,ment TL Bln.) 7. of GaD 1971 1971 1966-71 Current Receipts 3'-- 21.1 19.c Current Expenditure 15.2 19.1 15.8 Current Surplus 2.0 Capital Expenditures 2 14.2 8 8.8 External Assistance (net) O